Can Berkshire Beat the S&P 500 over the Next 10 Years?
Berkshire Hathaway (BRK.B) has outperformed the S&P 500 (SPX-INDEX) (SPY) over the past few decades and has generated strong returns for shareholders under the leadership of Warren Buffett. Over the past five years, investments in Berkshire stock would have yielded a 110% return, compared with 74% for the broad index.
Berkshire Hathaway is a combination of hedged deployments and active asset management, which has helped it to intelligently diversify risk and maintain higher-than-index returns. The fact that its cash pile has been rising consistently, closing at the ~$100-billion mark, without any pressure on management for deployment, shows the grit of Buffett in buying companies that qualify for his investment criteria.
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Consistency in the approach can result in continued investments at lower valuations, which can help command a premium return in the next decade over the broad index. Its spread across the insurance, financials, manufacturing, services, railroads, and energy sectors give the company a diversified earnings stream. With a market capitalization of ~$439 billion, Berkshire is one of the biggest holding companies in the world.
In 2Q17, Berkshire missed analysts’ estimate of $2,800 and posted EPS (earnings per share) of $2,592, compared with its EPS of $3,042 in 2Q16. The decline was mainly due to lower investment gains, underwriting gains, partially offset by higher BNSF and manufacturing profitability and revenues. The company’s operating profit fell 11% to $4.1 billion.
Investment gains, liquidity
Berkshire’s investment gains declined mainly due to broad market declines, and this trend is expected to continue in the upcoming quarter. The company’s revenues increased to $57.5 billion from $54.3 billion in 2Q16, helped by BNSF and higher insurance revenues, partially offset by a decline in the finance division’s revenues. As of June 30, 2017, Berkshire had a record $99.7 billion in liquidity. The company has on book profit of ~$12.5 billion from holdings of Bank of America (BAC), which are expected to be converted into equity. It competes with asset managers like BlackRock (BLK) and Blackstone (BX) for deployments in addition to American International Group (AIG) and MetLife (MET).
In this series, we’ll study Berkshire’s expected performance over the next decade, focusing on major sectors that could contribute to the generation of alpha, as well as on dividend policies, liquidity management, asset managers, and valuations.