Warren Buffett's conglomerate still has plenty of upside potential.
Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) has generated massive gains for its investors over the past six decades. Warren Buffett bought his first shares of the struggling textile maker for his fund back in 1962 and took over the company in 1965. If you had also invested $1,000 in the company at the beginning of that fateful year, your investment would be worth $2.1 million today.
Some investors might be reluctant to chase the stock after that historic run. But even as the market hovers near its all-time highs, I believe it's still a smart idea to buy Berkshire Hathaway's stock for four simple reasons.
Image source: The Motley Fool.
1. Berkshire Hathaway stock offers instant diversification
Under Warren Buffett, Berkshire Hathaway became a massive holding company for individual stocks and ETFs. Today, it holds nearly 50 stocks and ETFs -- and its top positions include Apple, Bank of America, American Express, Coca-Cola, and Chevron. It also directly owns Geico, Gen Re, and other smaller insurance businesses.
Berkshire's top holding is Apple, which accounts for 43% of its portfolio. That's a lot of exposure to a single company, but Buffett has repeatedly praised its strong brand appeal, wide moat, fortress balance sheet, and consistent buybacks.
The rest of Berkshire's portfolio is more broadly diversified across a wide range of sectors, and a lot of its recent growth was driven by its insurance underwriting business and energy investments. Simply put, it's a perfect fit for investors who want to instantly diversify their portfolios through a single stock instead of through mutual funds or ETFs.
2. Berkshire stock consistently beats the S&P 500
Many actively managed funds have struggled to consistently beat the S&P 500 index. That's why John Bogle, the founder of The Vanguard Group, preached the idea of buying passively managed, low-cost index funds that tracked indexes like the S&P 500 instead of trying to beat the market.
That's still great advice for most investors, but Berkshire Hathaway's stock rallied more than 600% over the past 20 years as the S&P 500 index rose about 380%. During those 20 years, it only experienced three annual declines in 2008, 2011, and 2015. That past performance doesn't guarantee any future gains, but Berkshire's strong track record of beating the market makes it a compelling alternative to investing in a simple ETF or index fund that merely tracks the S&P 500.
3. Berkshire Hathaway has plenty of cash
Berkshire Hathaway ended the first quarter of 2024 with $189 billion in cash and equivalents. That massive war chest, which surpasses Apple's $162 billion in cash and marketable securities in its latest quarter, gives the company plenty of room to expand its portfolio. So even if the market crashes, the company should have plenty of dry powder to deploy on more stocks as it sticks to Buffett's mantra of buying when others are fearful and selling.
4. Berkshire stock still looks reasonably valued
Berkshire Hathaway can be difficult to value because its net profits fluctuate year to year based on the performance of its massive investment portfolio. So instead of focusing on its price-to-earnings ratio, many investors focus on Berkshire's price-to-book ratio to see if it's undervalued or overvalued. If we look back at the past 20 years, its current price-to-book ratio of 1.5 looks reasonable relative to its previous valuations.
Source: YCharts
Most of the top companies in Berkshire's portfolio will benefit from a warmer macro environment and lower interest rates. So as the macro environment improves, Berkshire's underlying investments should grow and its book value increase.
Berkshire Hathaway probably won't generate jaw-dropping gains over the next few quarters. But if you buy the stock and stick with it for a few more decades, there's a good chance you'll outperform the S&P 500 and other top blue chip stocks.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Chevron. The Motley Fool has a disclosure policy.
