Berkshire Hathaway and Buffett Are Not a Buy

Warren Buffett’s Berkshire Hathaway  (BRK.B) – Get Berkshire Hathaway Inc. Class B Report has been having a great year. 

Shares of the insurance conglomerate recently touched an all-time high as the stock found clear sailing through inflation, rate hikes and war over the past three months. 

But while high-priced stocks can be great to hold, they don’t always reward new investors. In other cases, a price surge can indicate an over-valued/over-bought stock.

As Paul Price writes in his space at Real Money, that’s currently the case with Berkshire Hathaway  (BRK.B) – Get Berkshire Hathaway Inc. Class B Report.

“Media talking heads love to rave about stocks that just ran up sharply,” Price wrote recently on Real Money. “Rather than question whether that makes them expensive or overpriced, they typically try to justify the moves.”

That, he said, is what happened recently when BRK.B climbed past $362 per share. Analysts and business journalists jumped in to try and reverse engineer the fundamentals, creating an explanation for why this company must now be worth what its stock price says.

And that can be true. Sometimes a company really has gained in value and deserves a higher valuation, but the key thing to remember is this:

Don’t look at a company’s stock price and then justify that based on its fundamentals. Invariably, as Sherlock Holmes once said, you’ll begin to twist facts to suit theories instead of the other way around. Instead, look at the company’s fundamentals and decide if you can justify the price.

“Warren Buffett feels that Berkshire should be valued on a price-to-book value basis rather than on price-to-earnings because of the cyclical and volatile nature of the insurance businesses under its control,”  Price wrote. “In the full decade ended Dec. 31, 2021 the stock averaged just below 125% of book value.”

By contrast, “BRK.B’s March 29 new high came in at an absurd 1.95-times projected year-end 2022 book value,” he added. 

The takeaway? “Anything is possible, but the statistical probability of the shares getting more overpriced are a tiny sliver of the chances that it will regress toward the mean,” according to Price.