Should You Buy Berkshire Hathaway While It’s Below $450?

In the long term Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) investors are incredibly happy. For decades, this stock has consistently beaten the market. Since inception, its average annual returns have been around 20% — about double the performance S&P 500.

But is Berkshire stock still a buy today? If you want to set up your portfolio for success, keep reading.

Is Berkshire stock too expensive at $450 per share for a share class?

For years, Berkshire’s chief executive, legendary investor Warren Buffett, has described book value as a reasonable way to value the company. After all, the company was essentially a vast and complex conglomerate of disparate assets. By looking at the company’s price-to-book ratio, you could see how the market values ​​these assets, in a very rough way.

In the past, Buffett believed that Berkshire’s assets were worth at least 1.1 times book value, or the value of assets recorded on the balance sheet. So he initiated share buybacks whenever the valuation fell that low, arguing that buying back shares at a discount (or tiny premium) to book value was a great way to increase shareholder value. He later raised the buyback threshold to 1.2 times book value — meaning Berkshire would buy shares whenever the market valued the stock at less than 1.2 times the stated book value of its assets.

More recently, however, Buffett has abandoned the price-to-book ratio threshold. That’s seemingly convenient, given that the stock trades at a multi-year high of 1.6 times book value. But there is good reason for the change. Berkshire bought billions of dollars in stock each quarter. These moves, while enhancing shareholder value, actually tend to suppress the company’s stated book value. So it’s a smart move for shareholders, but it artificially lowers book value. The result—all else being equal—is that Berkshire’s price-to-book ratio will rise, even if the stock doesn’t necessarily become more expensive.

The best way to value Berkshire Hathaway stock

So how do we rate Berkshire stock today? To achieve this, investors need to ask a different question: How long will Berkshire’s business model continue to outperform the market?

It’s true that Berkshire looks expensive at the reserve price right now. Although, as we discussed, the premium is partially inflated due to huge share buybacks. But what investors should be paying attention to is how much money Buffett and his team are actually generating for shareholders. There has been some volatility, but in recent years the return on equity and annual book value growth have both been around 10%. And remember, these numbers are slightly understated because share buybacks have reduced the stated book value. However, despite this accounting headwind, yields are still at or above 10% on average.

BRK.B Price-to-book value data by YCharts

If Berkshire is able to maintain returns above 10% per year despite the share buybacks — a feat that is highly possible given that the company enjoys several structural competitive advantages — the stock is likely a buy, even if the current price multiple suggests that stocks are overvalued. compared to historical averages. Consider this: there is not It’s been a bad time to buy Berkshire stock in the past. Even if you bought right before the financial crisis, the dot-com bubble burst, or the pandemic crash, your portfolio would still have performed very well over the long term. If you’re patient, paying a premium for such a bluechip stock is a no-brainer. That initial premium, spread over a decade or more, is quickly diluted.

Is Berkshire stock expensive as it hovers around $450 per share? Many would argue that it does. But is it so expensive that long-term shareholders should ditch the stock? Absolutely not. Whether you already own the stock or are interested in diving in, don’t let the current valuation stop you from taking a long-term position.