Is Berkshire Hathaway a Contender or Pretender in 2020?

Berkshire Hathaway

We want to avoid stocks that are more likely to lose us money than not, but there’s another type to avoid, tired old dogs that haven’t kept up with the pack for many years.

Is there really anything to like about Berkshire Hathaway stock these days? How could anyone choose an old dog like this over the pick of the litter among the majority of stocks that has bettered it for so long now?

Underperforming stocks are a fetish of many, but picking this mutt over all the much stronger and much more pedigreed competitors already has this pick standing out as one that will be very hard to defend. The change required to wake this thing up and raise it to the heights that a top 10 stock must aspire to, which some consider it to be, would need to be pretty massive, and even beyond what would even be possible in our wildest dreams.

We can start with the fact that this is being portrayed as a “defensive” stock. There may be a little truth in this, but if so, it may be that this stock got so much of the life sucked out of it during the 2000 crash that can only be beat down so much. It has managed to not go down as far as the market has since, but this is only a positive if it helps lead to a better net gain, and the words better or even good haven’t fit this stock for a couple of decades now.

Berkshire Hathaway stock is actually down over 25% over the last 20 years, and this has indeed put its book value on the low side, but we need to consider why it is so low, and it’s not because its stock is so desirable, but that it is not, has not been, and is reasonably expected to remain undesired and undesirable.

Seeing the company embarrass themselves by holding a quarter of their assets in cash isn’t the reason why they underperformed so much this year though, because if you multiply their 2019 growth of 12% by 1.25 you only get 15%, still only half what the market returned. When you get beaten this badly by the market, you are not doing well at all.

Both the Chart and the Fundamentals Portend More Ugliness

There is nothing in their stock performance not only this year but for a long time that should have us ever believing that this could even be a good play here, let alone a top one.

It just eked past its high of last October, and most stocks passed this line quite a while ago and are well over that mark now. This is actually a good illustration of how things come together with this stock, as they only lost 15% during the bear market but it’s taken them this long to make this little amount back. When you miss the S&P 500 boat by 18% this year, none of this should be surprising.

This is plainly reflective of the fact that the stock market simply does not like this stock very much now, and again, has not for a very long time. Investors don’t get visited by ghosts of Christmas past but that’s probably what it would take to turn the mood with this turkey around enough to have it hit the heights or even drag itself from the ground.

If the fundamentals of the stock were starting to really shine, with real good earnings growth, then we might have a leg to stand on, albeit a wobbly one since the stock is so out of favor with whatever may be going on. If they were growing their earnings well and the stock was performing like this, that might even be scarier, although we might want to assume that the weight of exciting results quarter after quarter might soften the market’s current level of displeasure.

Berkshire’s fundamentals are going the other way though, which is the real reason why this pick is so bizarre. Year over year, their earnings just came in 52% lower, which is not exactly growth and especially not the kind of growth to light a fire under this beast. 2018 saw a 91% decline over the previous year, and if anything, the picture that its fundamentals paint is an even grimmer one for 2020 than their chart, which is saying something.

Put the two together and we have a stock with two strikes against it trying to bat with a broken arm. In this game, there are only two pitches though, and when you miss both of them this badly, this foretells gloom pretty reliably and does not even deliver a hint of even being able to keep up to the market in 2020, let alone lead it.

Their earnings are seen as rising though by some, based upon some unexplained perception, although if we dressed up this scarecrow in the finest clothes that we can put on it, this has it at best leaning toward becoming more stable, which is always a plus but does not drive growth. Berkshire Hathaway had its best quarter in recent memory in Q4 2017, but during the next quarter, the stock actually went down. We can’t really count on earnings to do much for the stock because even when it improves, no one really cares and you’re lucky if you don’t get another haircut.

Berkshire Is So Ugly that It Is Pretty, or it Would Seem

This leaves us with their apparently tempting 1.3 times book value that the stock is trading at. Smaller books don’t just turn into bigger ones though magically, even though you would think this was the case given how people actually see this as a plus, and presumably a big enough one to vault it into the top 10 in some people’s eyes. This isn’t just wearing rose-colored glasses, it’s wearing ones that feature a kaleidoscope.

If we could place a bet at even money on Berkshire Hathaway underperforming the market again next year, that just wouldn’t be in the top 10 of plays we could make, it probably is number one. You don’t get this kind of odds holding any stock.

This alone should make it clear how foolish an idea as this actually is. Every percentage of gain we forsake by being on the wrong horse is a percentage that we lose, and having the opportunity to invest with a legend may have been a good idea at one time, but not after it has been thrown into the old folks’ home.

The book value of a stock is actually an indicator that points to the health of a stock, and we do not want to suppose that the sicker a stock gets, the better it looks.

We can’t use price-to-earnings ratios with this one, not that it would matter. because it’s already above average, even though some are still trying to call it underpriced based upon it’s P/E. This one requires the sleight of hand of an expert magician, and they never tell us what is behind their magic, which is the case here as well.

Perhaps we need to hear them now and believe them later, but that’s no way to invest. Rather than be excited about the prospects of this stock, we should instead be sad, to see it age so much and now spend most of its time in the rocking chair, with some impressive tales to tell about the glory days, which we know will pass you by.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: [email protected]

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