This article is an excerpt from Barronâ€™s 10 favorite stocks for 2021. To see the full list, click here. Â
Berkshire Hathaway is coming off one of its worst periods of performance, relative to the S&P 500, during Warren Buffettâ€™s 55 years at the helm. The stockâ€™s total return is 44 percentage points behind the S&P 500â€™s since the start of 2019.
In the past, it has paid to buy Berkshire (ticker: BRK.A) after bad stretches, even the 1974-75 bear market and the 1999 tech bubble. Berkshire, for instance, gained 129% in 1976. Investors now seem concerned about what happens when Buffett, who is 90, leaves the scene.
The conglomerateâ€™s Class A shares, trading at $338,500, look like a bargain at 1.2 times Barronâ€™s projected year-end book value of about $279,000 a shareâ€”against an average of 1.4 times over the past five years. Buffett has said that Berkshireâ€™s intrinsic value is considerably above 1.2 times book. The Class B shares trade around $222.
Berkshire is both a defensive play, thanks to its cash hoard of $145 billion, and a reopening play, because of its many economically sensitive businesses like the Burlington Northern Santa Fe railroad.
â€œBerkshire shares represent a solid opportunity for investors looking for stocks to own in an economic recovery,â€ says James Shanahan, an Edward Jones analyst who has a Buy rating on the stock.
Shanahan has no price target, but if book value grows 8% in 2021, the stock could approach $400,000 a share, assuming an expansion of its multiple of 1.3 times book.
It is encouraging that Buffett decided to buy back a record $9 billion of stock in the third quarter, or nearly 2% of the shares outstanding. That pace may continue in the current quarter, as the stock continues to trade cheaply.
Write to Andrew Bary at firstname.lastname@example.org