Berkshire Hathaway Now Offering A Margin Of Safety For New Investors (NYSE:BRK.A)

The market has been volatile and caused many quality stocks to sell off in recent weeks. One of the businesses that falls in this category is Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). Shares have sold off more than 10% recently, and I think shares are a buy under $300 for long-term investors.

Investment Thesis

Berkshire Hathaway is a large, diversified conglomerate with large subsidiaries including insurance, the BNSF railroad, and an energy division. They also own numerous smaller subsidiaries and a massive stock portfolio, anchored by Apple (AAPL), Bank of America (BAC), and increasingly energy stocks like Chevron (CVX) and Occidental Petroleum (OXY). Berkshire has continued to add to the OXY position, and my guess is that they continued to add to certain positions in Q2 as the market selloff intensified. I think it is also possible that we see increased share buybacks as the share price has fallen recently. For investors with a long time horizon, Berkshire is now trading at very attractive levels.

A Brief Update on the Last Couple Months

Berkshire has been piling cash into stocks in 2022, and my guess is that we will see that continue into the second quarter. They have continued to scoop up shares of OXY, which we know about because of the different regulatory disclosures required due to the size of Berkshire’s stake in OXY. They bought another 9.6M shares after shares had dropped more than 20% off highs.

Berkshire now owns more than 16% of the company, and their options would increase the stake above 25% if exercised. It’s a massive stake that was built up fairly quickly, and they now own ~153M shares worth $8.5B. I’m curious to see what else Berkshire has been buying and selling in the second quarter, but I think the OXY stake says a lot about their view on the economy, inflation, and energy.

Valuation

Berkshire is a little harder to value than the typical business due to the diversified nature of the conglomerate and its earnings being driven by the fluctuations of the stock portfolio. The current market cap of $614B leaves a margin of safety for new investors in my opinion. The existing subsidiaries continue to throw off a ton of cash, and they have continued to deploy capital into attractively valued assets. If you don’t have a position and are interested in starting one, I think it would be worth nibbling at current prices. I would start adding more aggressively if shares continue to get hit and drop to $250. That would leave a very wide margin of safety, and I think it is only a matter of time before Berkshire is worth $1T. With the company buying back shares along the way, I think attractive returns lie ahead.

Inflation, Deflation, or Stagflation?

While I pay attention to the macro picture and try to do as much research as possible on what is going on to stay informed on interest rates, world economies, and central bank policy. There is a saying that is equal parts blessing and a curse, saying “May you live in interesting times.” When it comes to the world economy and the last couple of years since the beginning of COVID lockdowns, I think we are certainly living in interesting times.

Many of you have likely noticed the inflation in energy prices, food costs, and many of the primary costs of living. This has come at the same time as a deflation in asset prices, from bonds to equities, and now it is starting to filter into the real estate market as mortgage rates have spiked significantly since the start of the year. I think inflation is probably going to stay at an elevated rate, especially with our country’s poor energy policy and the direct link between energy and inflation. Many experts think we are headed for a recession (or are already in one), and earnings will come down as the economy slows.

Some are expecting a central bank pivot from the tightening policy in the coming months, while others expect rate hikes to continue until something breaks. I’m not counting on it, but if you look at recent history as a guide, they have been clearly trying to boost asset prices and inflate the national debt away. While it seems like they are trying to slow demand with rate hikes this year, my base case is that the Fed won’t hike interest rates much further and value stocks are my preferred investment choice. They don’t have a ton of valuation downside, they typically pay out large dividends, and they typically do alright in most market environments.

Berkshire doesn’t pay a dividend, but it is a company that fits in the value bucket. It is well positioned to handle whatever may come, with its diversified subsidiaries and investments to go along with a massive pile of cash. My guess is that they will continue to put cash to work in selective stocks, and I think they could accelerate their buybacks with the recent price drop.

More Buybacks?

Berkshire continued to buy back shares even as the price increased, but it was at a reduced pace. I’m curious to see how many shares they bought back in Q2, but my guess is that they will start to increase the buybacks. As a shareholder, I’m hoping they use the selloff to ramp up the buybacks in the next couple of months, especially if shares stay below $300.

Conclusion

Berkshire is quite possibly the ultimate sleep well at night stock. It’s well diversified nature and massive cash balance means that there is very little bankruptcy risk, and it still provides investors with reasonable upside at current prices. They have continued to build the OXY stake in Q2 as energy prices and inflation have remained elevated, and my guess is that they have also been adding to other stocks as well. I will be watching closely when Berkshire files its 13F update on its portfolio to see what they have been buying and selling.

Elevated inflation and other factors have led some to believe that we are headed into a recession. I don’t pretend to be a macro expert, but I’m certainly paying attention to some of the factors that will have an impact on markets outside the individual companies that I’m invested in. Berkshire will be able to handle whatever curveballs the economy (and the Fed) have in store, and investors have significant upside at current prices. With the recent share price decline, I think we will also see an increase in buybacks, which helps the long-term bull case. For investors looking for a conservatively run business with a bright long-term future, look no further than Berkshire Hathaway.