In 2023, Berkshire Hathaway's stock performance was notably lackluster, trailing behind the broader market trends, marking a decade of underperformance compared to major indices. Warren Buffett's esteemed conglomerate has seen its Class A shares gain approximately 16% this year, a figure that pales in comparison to the S&P 500's roughly 26% total return.
Over the past five years, Berkshire's annualized return stood at 13.4%, which again falls short of the S&P 500's 16.4% return, as per Bloomberg's calculations. Even in the long-term perspective of the last decade, Berkshire's annualized return of 12% slightly trails the S&P 500's 12.2% yearly total return, inclusive of dividends.
As of the most recent trading session, Berkshire's Class A shares were modestly up, trading at $542,600, while Class B shares saw a slight increase to $356.47. However, over a 20-year span, Berkshire's stock has matched the index with a 9.8% annualized return. This is noteworthy considering the company's significant operating profit growth and Buffett's strategic investment in Apple, which has realized a near $150 billion gain for Berkshire.
Berkshire Hathaway's performance highlights the challenges faced by even seasoned investors like Buffett in outperforming an index heavily influenced by major tech stocks, especially given Berkshire's substantial asset base of around $1 trillion.
The reasons for Berkshire's recent underperformance are not immediately clear. The company is on track for a record profit year, with after-tax operating earnings potentially increasing over 25% to nearly $40 billion in 2023. Its substantial property and casualty insurance business, including Geico, is thriving, and its $350 billion equity portfolio, heavily weighted by Apple, is outperforming the market.
Berkshire's railroad business, Burlington Northern Santa Fe, has also seen an increase in value, aligning with the performance of its primary competitor, Union Pacific. The company’s total valuation stands at about $775 billion, with BNSF potentially valued at $150 billion.
An additional boon for Berkshire has been the rise in short-term interest rates since early 2022. With over $150 billion in cash, mostly in U.S. Treasury bills yielding above 5%, the company has benefited from these higher rates. However, investor concerns may include potential lower earnings on this cash reserve if the Federal Reserve reduces short-term rates.
Concerns regarding Buffett's age and succession plans have also surfaced, especially following the recent passing of Vice Chairman Charlie Munger. While Buffett remains active and engaged, his acknowledgment of being in the "extra innings" of his tenure adds a layer of uncertainty regarding the company's future leadership.
Despite these challenges, Barron’s recently highlighted Berkshire as a top stock for 2024, citing its reasonable valuation at 20 times projected 2024 earnings and a 1.4 times multiple over the estimated year-end 2023 book value of approximately $390,000 per Class A share.
While Buffett's time at the helm may be limited, his keen investment acumen remains evident. There's still potential for a significant acquisition, possibly in the realm of $50 billion or more, a goal he has long pursued.
Despite previous statements indicating no interest in acquiring Occidental Petroleum, Buffett’s increasing stake in the company, now at about 28%, could signal a change in strategy, positioning Berkshire to potentially take over the energy company valued at over $50 billion.
