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Understanding Berkshire’s Valuation Premium High

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Jul. 13 2017, Updated 9:07 a.m. ET

Performance in line with index

As of July 2017, Berkshire Hathaway (BRK.B) stock has risen 0.33% in the past month and 19.1% in the past year. By comparison, the S&P 500 (SPX-INDEX) (SPY) has fallen 0.26% over the past month and 13.9% in the past year.

For 2Q17, Berkshire is expected to see sequential growth in earnings on improved performance in insurance, BNSF, manufacturing, and energy. The investment giant has concentrated its portfolio largely on the US after the 2007 financial crisis and has seen stable returns as the economy has improved.

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Berkshire’s operating model is a combination of conglomerate and active asset management businesses. The company raises funds from the insurance business in form of premiums and doesn’t invite institutional investors or limited partners for investments. The company competes for deployments and fund acquisitions in profitable companies with traditional and alternative asset managers like Carlyle Group (CG), Blackstone (BX), and BlackRock (BLK).

Widened valuation premium

On a one-year forward PE (price-to-earnings) basis, Berkshire is trading at 20.9x, while its peers are trading at an average of 12.8x. As of March 31, 2017, Berkshire’s equity portfolio was valued at $163 billion, compared with $148 billion in the previous quarter. In 2Q17, its major holdings had the following performances:

  • Coca-Cola (KO): 5.7% rise
  • Kraft Heinz (KHC): 5.7% fall
  • American Express (AXP): 6.5% rise
  • International Business Machines (IBM): 11.7% fall
  • Wells Fargo (WFC): 0.5% fall
  • Apple (AAPL): 0.3% rise

With its diversified portfolio and track record, Berkshire can continue to trade on par or above the index’s valuations. The company is sitting on record liquidity, which allows Buffett to look for more acquisitions in coming quarters.

Historically, Berkshire’s investors have not demanded aggressive actions from their investment managers, as the company makes calculated decisions based on defined policies.

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