Warren Buffett's Berkshire has beaten the market in past recessions, making it a 2023 defensive play

Published Wed, Feb 8 20239:34 AM ESTUpdated Wed, Feb 8 202310:11 AM EST

With a massive cash pile and diversified businesses, Warren Buffett 's Berkshire Hathaway has a track record of outperforming the market during economic downturns, according to UBS. The conglomerate has proved to be resilient leading into and through the last three recessions since the early 1990s, the Wall Street firm said after studying performance data. It showed Berkshire shares outperforming the S & P 500 and other financials. "During the past three recessions, BRK's shares have outperformed the market and other financials owing to its diverse business mix, very strong balance sheet, and substantial liquidity," UBS analyst Brian Meredith said in a note. "Given the uncertain economic outlook in 2023, we believe BRK's stock can outperform." The analyst also called Berkshire "a defensive play in an uncertain economic outlook." The Omaha-based conglomerate's operating business is a patchwork of companies spanning from railroads to energy, insurance, home furnishing and retail. The diversification of businesses has historically helped Berkshire weather the turbulence in the economy. UBS said fundamentally Berkshire's insurance operations should be relatively insensitive to a slowdown in the economy and the fundamental backdrop is favorable with increasing commercial lines and "hard" reinsurance pricing and accretion from the acquisition of Alleghany. Berkshire agreed to buy insurance company Alleghany for $11.6 billion, or $848.02 per share, in cash, inking Buffett's biggest deal since 2016. The deal closed in the fourth quarter. On the other hand, Berkshire's noninsurance businesses are more cyclical or economically sensitive, especially its railroad and real estate operations, UBS said. These businesses could present a headwind for Berkshire in 2023, UBS said. However, Berkshire has historically been able to take advantage of economic slowdowns by purchasing or investing in quality businesses at attractive prices, which tended to offset any drag on its business, UBS said. Buffett went on a buying spree during the volatile 2022. Other than the Alleghany deal, the conglomerate used significant amount of cash to purchase public stocks including Chevron , Occidental Petroleum and Taiwan Semiconductor . Occidental was the best-performing stock in the S & P 500 , more than doubling last year. "BRK has proven itself to be an effective steward of its capital long term and carries a substantial cash balance," Meredith said. "Accretive acquisitions or higher than expected share buyback could be an additional catalyst." Berkshire shares are now trading at a 20% discount to the conglomerate's intrinsic value , which may prompt the "Oracle of Omaha" to buy back more of his stock, UBS said. The conglomerate's stock held up well in 2022 with a 4% gain, but shares are 14% off their all-time high of $544,389.25 hit in March 2022. At the end of September, the conglomerate amassed a cash pile of nearly $109 billion.