BRK a Buy or Sell Now? Intrinsic Value, Cash & Margin of Safety!
Summary
Sven analyzes Berkshire Hathaway’s recent financial performance and valuation metrics, concluding that the stock is currently overpriced. Sven points out that while operating earnings are healthy at around $45 billion, the company's price-to-earnings (P/E) ratio has expanded to 25, significantly higher than its historical range of 10 to 15. To achieve an 8% annual return over the next decade, Sven calculates that Berkshire would need to grow its earnings by 13.5% annually, which he deems nearly impossible given its massive size.
Sven discusses the shift in leadership to Greg Abel, noting that Abel is beginning to deploy cash in what Sven considers the most expensive market in history. Sven highlights that while Berkshire remains a safer bet than the S&P 500, it still carries a downside risk of approximately 30%. Sven aligns his perspective with Michael Burry, suggesting that the "fat pitch" Buffett was waiting for is no longer present at these price levels. Sven emphasizes that "crashing less" than the market is not the same as value investing, and at current prices, he would personally sell the position if he held it.
Mentioned Stocks
Reasoning: Sven mentions that Google might be a better place for cash than Treasuries, provided it maintains double-digit growth. However, Sven does not give an explicit buy recommendation, focusing instead on how Greg Abel might be viewing it as an alternative to cash.
Reasoning: Sven notes that returns on Apple deployment are currently around 6-7%, which is lower than the 8-10% return Buffett typically targeted. Sven views this as a sign of diminishing returns for Berkshire's capital allocation.
Reasoning: Sven argues the current P/E of 25 is too high compared to the historical average of 10-15. Sven calculates that to get an 8% return, the company needs 13.5% growth, which is unlikely. Sven sees a 30% downside risk and states he would sell the stock if he owned it.