Why Warren Buffett’s Berkshire Hathaway is my top stock pick, even at all-time highs

Shares of the conglomerate run by Warren Buffet Berkshire Hathaway (BRK.B -2.85%) (BRK.A -2.74%) they absolutely demolished the market this year. Shares are up 34% year to date. This compares with S&P 50016% gain and Nasdaq CompositeIts 14% increase at the time of writing.

Given the company’s incredible outperformance, many investors may be convinced they missed the boat. But a close look at Berkshire reveals that the stock is still attractively priced relative to the broader market.

Here’s why Berkshire stock is still worth buying, even though the company’s market cap is over $1 trillion.

A conservative assessment

Conservatively valued companies are increasingly difficult to find. The S&P 500Its aggregate price-to-earnings (P/E) ratio today, for example, is 24 — up from 22 this time last year. The Nasdaq 100P/E of 31 is even frothier. But Berkshire, despite its recent stock performance, still trades conservatively in this richly valued market.

Berkshire’s recent unrealized gains from aggressive sales of shares in its massive stock portfolio are skewing its P/E. However, a useful (but not perfect) comparison of its valuation relative to the market as a whole can be made by looking at the company’s share price compared to its operating earnings over the last 12 months, excluding gains and losses from investments. That multiple for Berkshire is currently around 25.

That’s a very small multiple for a company that has recently grown this adjusted operating income figure at a consistently double-digit year-over-year growth rate. Berkshire’s adjusted operating earnings in the most recent quarter rose 15.5% year over year, supported by strong growth in its insurance business. Additionally, adjusted operating profit growth for the first six months of the year compared to the same period last year was 26%.

But the best thing about Berkshire stock is that investors aren’t just getting the Berkshire subsidiaries behind that adjusted operating income growth, they’re also getting a huge portfolio of stocks and a mountain of cash.

A war chest of cash, cash equivalents and shares

Wall Street thought Berkshire had plenty of cash last year, when the company had $189 billion in cash and cash equivalents on its balance sheet. But today, the conglomerate sits on a record war chest of $277 billion — a figure that equates to 27 percent of its current market capitalization.

Note that this excludes the company’s monstrous stock portfolio, which currently stands at around $312 billion. That means Berkshire’s cash, cash equivalents and marketable securities make up more than half of the company’s market capitalization.

Taking all of that into account, Berkshire trades at about 25 times trailing 12-month adjusted operating earnings and also comes with a $312 billion stock portfolio and a $277 billion cash pile.

Of course, there’s always the risk that Berkshire won’t be able to find enough substantial attractive investments to deploy some of its cash going forward, ultimately weighing the business’s performance against its $1 trillion-plus market cap. . But with short-term Treasuries yielding more than 5%, there is no rush to deploy this capital. Berkshire will likely take its sweet time shedding its cash hoard, even waiting for a stock market rout.

Investors, of course, should do their own due diligence and decide for themselves whether they think Berkshire is a good stock. But it’s definitely my top choice.