Here’s Why Black Bear Value Remains Comfortable in Keeping Berkshire Hathaway (BRK-A)

Black Bear Value Partners, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of +1.6% was recorded by the fund for the first quarter of 2022 increasing its year-to-date return to +1.9%. Meanwhile, its benchmarks, the  S&P 500 and HFRI Index delivered a +3.7% and +0.2% returns respectively for the same period. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.

In its Q1 2022 investor letter, Black Bear Value Fund mentioned Berkshire Hathaway Inc. (NYSE:BRK-A) and explained its insights for the company. Founded in 1839, Berkshire Hathaway Inc. (NYSE:BRK-A)  is a San Francisco, California-based multinational conglomerate company with a $766.0 billion market capitalization. Berkshire Hathaway Inc. (NYSE:BRK-A)  delivered a 15.34% return since the beginning of the year, while its 12-month returns are up by 28.98%. The stock closed at $519,799.91 per share on April 13, 2022.

Here is what Black Bear Value Fund has to say about Berkshire Hathaway Inc. (NYSE:BRK-A) in its Q1 2022 investor letter:

“Below is the rough Berkshire on-a-napkin valuation I like to do periodically. Recently BRK acquired Alleghany for $11.6BB. I assume a reduction in cash for this amount and an increase of $550MM in operating income. I do not give benefit to the increased float nor any synergies. Again, this is a rough exercise to sanity check our assumptions.

Cash of ~$103,000 per class A Share (vs. $104k 1 year ago)

-Down/Base/Up marks cash at book value to an 8% premium (vs. to 10% a year ago)

-Investments based on December prices ~$248,000 per class A share (vs. $194k a year ago)

Presume a range of stock prices that result in:

-Down = $149,000 per class A share (-40%- assumes portfolio is overpriced)

-Base = $211,000 per class A share (-15% – assumes portfolio is overpriced)

-Up = $285,000 per class A share (+15%)

Operating businesses that should generate ~$17,000 of pre-tax income per Class A share (vs. $15k)

-Down = 9x = $153,000 per share – equates to ~8% FCF yield

-Base = 12x = $204,000 – equates to ~6% FCF yield

-Up = 12x = $204,000 – equates to ~6% FCF yield

Overall (vs. $529,000 at quarter end)

-Down = $413,000 (-28%)

-Base = $526,000 (fairly priced)

-Up = $600,000 (13% underpriced)

Going forward I expect Berkshire to compound at good, not great returns. The likely question is why own it at all if we expect modest returns…

BRK is a collection of high-quality businesses, excellent management, and a good amount of optionality in their cash position. If the cash were to be deployed accretively the true value would be greater than an 8% premium (as mentioned above). The combination of a pie that is growing, an increasing share of said pie due to stock buybacks, upside optionality from cash and a tight range of likely business outcomes that span a variety of economic futures gives me comfort in continuing to own Berkshire.”

Investments, Finance

Our calculations show that Berkshire Hathaway Inc. (NYSE:BRK-A) ranks 15th on our list of the 30 Most Popular Stocks Among Hedge Funds. Berkshire Hathaway Inc. (NYSE:BRK-A) was in 108 hedge fund portfolios at the end of the first quarter of 2022, compared to 106 funds in the previous quarter. Berkshire Hathaway Inc. (NYSE:BRK-A) delivered a 7.91% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.