For this short Thanksgiving week, I’ve decided to focus on Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and three of the most recent holdings. These included Jefferies Financial (JEF), Louisiana-Pacific (LPX) and a large stake in Taiwan semiconductor (TSM). Berkshire is a well-known company, but I expect to be grateful I bought it for years to come.
Berkshire is still the ultimate financial holding company that sleeps well at night. Shares have rallied throughout the year but are up slightly year-to-date (3%). I think they still offer a margin of safety today for investors looking for a diversified, large-cap company with a bulletproof balance sheet. They continued to use cash in the third quarter and are now able to earn some return on the pile of cash on the balance sheet as interest rates rise. They repurchased about $1 billion worth of stock in the third quarter, and I think that’s likely to remain the case unless stocks move higher.
This week I wrote articles about the three newcomers. Instead of going through them all again, I’ll provide links below. Taiwan Semi is by far the largest of the three, but they’re all cheap and pay solid dividends.
Aside from the new positions, Berkshire has continued to deploy cash in 2022. There were some selling to go with the purchases, but they were net buyers of shares for a total of $3.7 billion. They continued to add to their large energy positions in Chevron (CVX) and Occidental Petroleum (OXY). I’m curious to see what happens with these positions as they have quickly become a significant part of the stock portfolio over the past few years. Despite the economic uncertainty, I am bullish on energy as the supply/demand imbalance looks favorable for oil prices and energy stocks in general.
They also increased their stakes in RH (RH), Celanese (CE) and Paramount Global (PARA). On the sell side, they reduced bank holdings in US Bancorp (USB) and Bank of New York Mellon (BK) and kept Bank of America (BAC) steady. They sold STORE Capital (STOR), which is being acquired, and cut Activision (ATVI), which has its own pending acquisition with Microsoft (MSFT). Kroger (KR) and General Motors (GM) also saw some selling, while the rest of the portfolio was flat.
A $1 trillion conglomerate?
In a year that saw some of the biggest stocks smoked, Berkshire has kept chugging along. Operations have had their ups and downs this year, which is natural given changing economic conditions, but shares are up 3% year-to-date. If you look at all the different parts of the company, I still think stocks are undervalued. Berkshire has a market cap of $685 billion today, and buying stock gives you an incredible mix of stocks, bonds, cash, and subsidiaries.
- A $300 billion equity portfolio
- A pile of cash and cash equivalents in excess of $100 billion
- Burlington Northern Sante Fe
- Berkshire Hathaway Energy
- A massive insurance subsidiary
- Various other subsidiaries
Berkshire is unique in its ability to generate cash at scale from various investments and subsidiaries. It won’t happen overnight, but I think it’s only a matter of time before Berkshire hits a $1 trillion market cap. Another reason investors like Berkshire is its declining share count due to buybacks.
Berkshire continued to buy back its shares, with another $1.05 billion in the third quarter. While this isn’t anywhere near the same rate as at the start of the year, I expect some buybacks to continue for years to come. I’m surprised there weren’t more buybacks in the third quarter, to be honest, given that shares have traded between $270 and $300, but they’re starting to get better interest rates on the cash stack, so it might be be part of the decision.
What are the risks?
In my opinion, Berkshire is one of the lowest-risk stocks available to investors today. The main risk I can think of, however, is a massive catastrophe that would leave Berkshire’s insurance business on the hook. If something like that happens, it’s a billion-dollar loss, but Berkshire’s balance sheet should be able to handle it. If they can’t handle it, we’ll likely have bigger issues to worry about than losing money in stocks.
The other risk I’m reluctant to point out is what happens to the company after Buffett and Munger leave. I think the company will do well and continue to grow for decades to come, but the thought of losing two executives who have steered the ship for so long is hard to imagine. Everyone knows they won’t be around forever and I think the company will be different if it’s not run by the people who built it. That being said, I don’t think it has a material bearing on Berkshire’s long-term bullish thesis.
Many contributors regularly write articles about Berkshire, and there are many valuable lessons to be learned about different parts of the conglomerate. There’s a lot of coverage of Berkshire’s stock holdings, as there should be with Buffett’s long-term track record of outperforming. I wanted to cover each of the new holdings in detail because they all look like attractive investments with a margin of safety.
If you follow podcasts or YouTube videos on macroeconomics and the investment environment, there is a lot of uncertainty about what next year will be like. This creates uncertainty for new ventures like Louisiana-Pacific in the real estate sector. The semiconductor industry had a tough 2022, but Taiwan Semiconductor is seen as the best of the group, despite the added complexity of geopolitical tensions with China. Rising interest rates coupled with persistent inflation have created a difficult environment for investors, but Berkshire is well-equipped to weather an economic downturn.
With its impressive balance sheet, large stock portfolio, and diversified exposure to various economic sectors, Berkshire remains the ultimate sleep-in-the-night financial stock. While the expectation of a $1 trillion market cap may seem overly optimistic, it’s a matter of your time horizon and risk tolerance. I still think the risk/reward tradeoff for Berkshire is skewed up, and the risk is limited in my opinion. I plan to hold my shares for the long term, and investors with a long-term time horizon can expect solid results from Berkshire.