In Warren Buffett’s recently published letter to shareholders, he mentioned how the S&P 500 outpaced Berkshire Hathaway Inc. (NYSE:BRK.B) in terms of market gains over the last four years. Soon after the disclosure, there came Larry Smith’s article entitled “Berkshire Hathaway is a Sell,” guiding investors away from the firm. Despite claims of Berkshire Hathaway Inc. (NYSE:BRK.B) being a “Sell,” there are actually enough reasons why investors should think otherwise.
Berkshire Hathaway Inc. (NYSE:BRK.B) boasts of its outstanding businesses and excellent management. The multinational corporation employs today, more than 288,500 staff across the globe. As company chairman Warren Buffett and vice chairman Charlie Munger continue to add to the intrinsic value of the firm, its stock is most likely to outpace the S&P 500 index in times to come. To think that the size of Berkshire Hathaway Inc. (NYSE:BRK.B) is a hindrance toward managing and generating large gains is rather irrational since the firm has a strong foundation, which help all its businesses stand firm together. Its management believes in maximizing profitability by remaining focused on expansion, through acquisition and investment. Although Berkshire could not succeed in closing any major acquisition deal last year, it managed to strike a $23-billion deal in collaboration with investment firm 3G Capital to buy global food giant H.J. Heinz Company (NYSE:HNZ) early this year.
Capitalizing on a low volatility scenario
One of the secrets of Buffett’s success is his understanding of low-volatility situations and leveraging opportunities in critical times. The acquisition of Heinz exemplifies that strategy. While others see the acquisition as an imprudent move on the part of Buffett, it is actually something that investors can cash in. Heinz ranks fifteenth on the list of the largest holdings with low trailing volatility and is the 97th percentile of the S&P 500. With Berkshire’s acquisition of the food giant, investors can have an equity stake in H.J. Heinz Company (NYSE:HNZ) and price it up compatibly with the leverage that Berkshire used when it acquired the brand. By learning to leverage low volatility stocks like Heinz, investors can replicate the returns and risk of Berkshire Hathaway Inc. (NYSE:BRK.B). This can be promising for both the high-yield bond markets and equities.
Sourcing Strength in stellar businesses
Berkshire is a diversified conglomerate that owns several businesses in its fold. The firm doesn’t bother about one of its segments underperforming. It rather believes in administering holistic approaches towards its ventures. The stellar businesses that equally maintain a shareholder-oriented culture continue to strengthen its roots. With Berkshire’s solid financial health, it can be said that it will soon surpass the S&P returns by a significant margin. Its “Big Four” investments, American Express Company (NYSE:AXP), The Coca-Cola Company (NYSE:KO), Wells Fargo and International Business Machines Corp. (NYSE:IBM), promise greater earnings, higher dividends, and capital gains for Berkshire in the coming years. Unlike other firms that limit themselves only to acquisitions that they can operate, Berkshire remains flexible in its capital allocation.
Berkshire’s investment in tech giant International Business Machines Corp. (NYSE:IBM), its third biggest equity stake, has gone up to 6%. By the end of 2012, it owned 68 million shares of International Business Machines Corp. (NYSE:IBM), amounting to $13 billion. When Berkshire Hathaway Inc. (NYSE:BRK.B) invested in IBM, it also considered International Business Machines Corp. (NYSE:IBM)’s bullishness in stock buybacks as it proved to be a more efficient way of returning cash back to investors than dividend payouts. Apparently, the recent move to further increase its stake in IBM will not only quench its thirst to grow, but also boost its EPS results. It seems that Berkshire may add to this position if IBM found trading near around $190 a share.
What’s not to like?
Taking into consideration Berkshire Hathaway Inc. (NYSE:BRK.B)’s overall portfolio, capital allocation, and robust financial position, it is currently a buy. Another important signal for investors is the growth of Heinz in the emerging markets, where Berkshire is likely to expand further. Overall, Berkshire at the moment is truly a solid pick for any investor who is not just looking at it from dividend perspective but also capital appreciation over the years.
The article Berkshire Being Likable Despite Taking Huge Risks originally appeared on Fool.com and is written by Jeremiah Feliciano.
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