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Berkshire Hathaway (BRK.B), which is led by the legendary value investor Warren Buffett, hit yet another milestone when its market cap topped $1 trillion on Wednesday. While many companies have a market cap above that threshold, Berkshire became the only non-tech U.S. company to join the coveted club.
Meanwhile, even as markets appear quite optimistic about Berkshire shares, and the buying spree has lifted the stock to record highs, the “Oracle of Omaha” himself doesn't seem to share the bullish view – or at least, that’s what his Q2 repurchase activity tells us.
In Q2, Berkshire net sold (total sells minus total buys) over $75 billion worth of shares, and spent a measly $345 million on repurchasing shares - which is nothing more than a rounding error for the conglomerate that’s sitting on a record cash pile of $277 billion. In fact, the Q2 repurchases were the lowest since Q2 2018, when Berkshire made no repurchases.
Did Buffett make a mistake by being stingy with share buybacks in Q2, as Berkshire stock has been scaling new highs? We’ll discuss in this article, beginning by analyzing Berkshire’s share buyback policy.
Berkshire Hathaway’s Share Buyback Policy
Until 2018, Berkshire used to repurchase shares only as long they were up to 1.2x of the book value - but in mid-2018, the company made the policy more flexible, giving more discretion to Buffett to buy back the shares. It hadn’t repurchased any shares in the preceding six years, but ever since, the company has spent more generously on buybacks.
In particular, Berkshire went on a buyback spree between 2020 and 2021, and repurchased over $50 billion worth of its shares between these two years. While the firm has since scaled back the repurchases, they never fell below $1 billion in any quarter until Q2.
Was Q2 Yet Another “Nightmarish” Quarter for Buffett?
In one of his interviews with the Financial Times in 2019, Buffett joked that his “nightmare” would be a scenario wherein he finds stocks expensive, while Berkshire Hathaway shares are fairly valued.
While the Berkshire chair has alluded that he is selling shares – especially in top holding Apple (AAPL) – to escape any increase in capital gains tax in the future, the selling spree shows that the top investor is also worried about valuations. Q2 looks like one of those quarters where Buffett was hard-pressed to deploy Berkshire's burgeoning cash pile.
BRK.B Stock Forecast
Despite being a trillion-dollar giant, Berkshire is covered by only 5 analysts, as the disdain between Buffett and the analyst community appears mutual. The stock has received a rating of “Moderate Buy,” and its mean target price of $477 is 2.7% higher than Wednesday’s closing prices.
While Buffett might not have found Berkshire shares very attractive in Q2, clearly the sell-side analyst community and markets have a different view.
Does Buffett Finds Berkshire Shares Overvalued?
Berkshire is not an easy business to value, considering the many moving parts and multiple companies that the conglomerate owns. However, we can still look at different metrics to gauge whether it's an attractive bet. For instance, its current price-to-book multiple stands at 1.61x, which is near record highs.
For Buffett, who until six years back was repurchasing Berkshire shares only once they traded below 1.2x their book value, the current multiples look high – especially given his value investing credentials.
The stock’s next 12-month (NTM) enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV-to-EBITDA) of 15.4x is also higher than historical averages. While Buffett’s former partner Charlie Munger did not had a positive view of “EBITDA” as an earnings metric, and said that it should be substituted with “bullshit” earnings, we don’t have many other multiples to value the complex business.
Should You Buy Berkshire Hathaway Shares?
I don’t find Berkshire shares to be a particularly tempting buy at these prices – but then again, there aren’t many “table pounding” opportunities in current markets, anyway.
However, I believe that Berkshire is one name that value investors can have as a core part of their portfolio. There are legit concerns over succession at Berkshire, especially whether Buffett’s hand-picked successor, Greg Abel, will be able to match his performance – if not persona.
However, Berkshire should always remain a conservative enterprise whose investing strategy should mimic the value investing tenants that Buffett has preached and practiced over decades.
As for the apparently differing opinions of Buffett and the markets, I believe they both have different yardsticks. Berkshire shares, as well as broader market valuations, might not fit Buffett's value investing framework, and he has been a net seller of stocks for seven straight quarters. Other investors, meanwhile, see value in not only broader markets, but also Berkshire shares, and have bid up both to record highs even as Buffett continues his selling spree.
One of them might be getting it wrong, however - which we'll come to find out only in hindsight.
On the date of publication, Mohit Oberoi had a position in: BRK.B , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
