By DAVE KANSAS
There's a stock out there that would probably interest Warren Buffett. It touched a 52-week low on Wednesday, trades just above book value and has a long track record of delivering solid returns.
The company: Berkshire Hathaway (BRK.B)
Berkshire hit $109,925 on Wednesday, its lowest level since June 2010. They have since recovered a bit to trade above $112,000, but the shares are still down about 14% since a Feb. 28 high of $131,300. Berkshire's shares haven't traded below $100,000 since January 2010. Berkshire's B shares, which trade at about $75, have performed in similar fashion.
At the end of the first quarter, Berkshire had a book value of $97,081 a share. That means Berkshire is trading about 1.15 times book value. According to Barclays, Berkshire's historical median valuation is about 1.7 times book value, and 1.1 times book value is about as cheap as Berkshire has gotten in past decade. Its historical price/book multiple since 2000 has been about 1.6. That would be about $155,000 a share based on first-quarter book value.
There are a handful of fundamental reasons that Berkshire shares have come down in value since February. The company's large reinsurance business, which provides insurance for insurance companies -- is facing headwinds after a round of natural disasters, especially in Australia, New Zealand and Japan.
In addition, Berkshire's stock holdings have a substantial concentration among financial stocks, including Wells Fargo, American Express, Bank of New York Mellon, MasterCard and U.S. Bancorp. That sector is the worst-performing among the S&P 500's 10 groups this year, down 7.35% year-to-date.
More difficult to measure is the impact of the so-called Sokol Affair. Earlier this year, Buffett lieutenant David Sokol resigned his position after it emerged that he had acquired a stake in Lubrizol, a company that he later successfully persuaded Buffett and Berkshire to acquire. Sokol said his resignation was not related to the share purchase and that he doesn't believe he did anything wrong.
The messy nature of the events put a little tarnish on Buffett's sterling reputation. At his annual shareholder investment-palooza in May, Buffett acknowledged that mistakes were made, but also stated that he didn't think the Sokol Affair would "change a record of 80 years."
Since the meeting, the Sokol Affair has receded, along with Berkshire's stock. Whitney Tilson, a value fund manager, says Berkshire has gotten about as cheap as it ever has. He calculates Berkshire Hathaway's intrinsic value at $167,000 a share. Given the current deep discount, The Tilson Focus Fund and hedge funds Tilson manages have gobbled up shares, adding to positions this week and making it one of the firm's biggest overall holdings.
Berkshire shares were cheaper in November 2008 and March 2009, Tilson says, but during those two periods the very survival of a lot of financial institutions, including Berkshire, were up for debate. Today, that so-called tail risk is deeply diminished, one reason Tilson is scarfing up Berkshire.
Berkshire also has another tool that could respark interest in the company's shares: the ability to do a large deal. "They have $22 billion in net cash on the balance sheet, which gives them enormous firepower," said David J. Winters, head of Wintergreen Advisers, a fund manager who believes Berkshire is cheap. "Think of all the fear out there. They are one of the big groups that has the ability to be a buyer, and they have a lot more firepower than people realize."
One difficult to divine aspect of Berkshire's share price is the nature of a post-Buffett world. Some worry that the Oracle is a singular sensation, impossible to replace. That could be gnawing away at Berkshire's shares.
Buffettologists, however, think this is all overblown. "No question people are concerned about who is going to succeed Buffett," says Matt Pauls at Fernbank Partners, a hedge fund. "But it's really not a big deal. Ultimately, everyone runs their businesses, and that will keep happening no matter what."
Pauls concedes that allocating capital -- investing -- might be a bigger challenge, especially given Berkshire's massive size. He wouldn't be surprised if Buffett's successor returned a chunk of cash to investors by initiating a dividend as a good will gesture.
Investors may have to wait a long time for a successor or a fat post-Buffett dividend, Tilson believes. "I don't know whose name is in the envelope [to succeed Mr. Buffett], and I don't care," he says. "Buffett is at the top of his game and will be running this company another five, maybe 10, years."
If that's the case, Berkshire shares look remarkably cheap.