Buffett's Berkshire Hathaway trouncing the market this year and near a record heading into shareholder meeting

Published Fri, May 3 202412:35 PM EDTUpdated Fri, May 3 20241:58 PM EDT

Berkshire Hathaway shares are near all-time highs ahead of the conglomerate's annual shareholder meeting, but a few worries are weighing on analysts' minds. Berkshire's Class A and B shares have each outperformed this year. In March, the firm's Class A shares reached an all-time closing high of $634,440. They ended Thursday's session at an eye-watering $606,413.44, up more than 11% year to date. Meanwhile, Class B shares were last priced at about $400 a share, off its record close of $420.52, which it also reached in March. These shares have notched a roughly 12% advance in 2024. By comparison, the S & P 500 is up by more than 7% this year. Berkshire's gains were driven in part by the conglomerate's core insurance business, which reported a surge last year given the sector's strong pricing power. Operating earnings from insurance underwriting saw a 430% spike to $848 million in the fourth quarter from the year-ago period. Insurance investment income also rose. BRK.B ALL mountain Berkshire Hathaway Class B shares But that doesn't mean the stock is without its problems. Notably, the company's energy and railroad businesses were weaker last year, and investors expect to continue to monitor those areas for negative surprises. Some investors point to the recent number of high-profile lawsuits Berkshire Hathaway has contended with, a development that one analyst called "out of character" for the conglomerate. "There has been an increase in litigation risk at the firm," said Cathy Seifert, senior vice president at CFRA Research, adding, "I think recent circumstances have probably forced them into situations that they would prefer not be in." Berkshire Hathaway Energy Warren Buffett's Berkshire Hathaway has been contending with several high-profile lawsuits in recent months, including the settlement this year of a billion-dollar lawsuit with the Haslam family over how Berkshire valued Pilot Travel Centers, a truck-stop giant. But what investors will be closely monitoring is the ongoing losses related to wildfire exposure in Oregon and Northern California. Last year, for example, an Oregon jury found PacifiCorp, a subsidiary of Berkshire Hathaway, liable in a $1.6 billion class-action lawsuit over wildfires in the state in 2020. In his annual report, Buffett said those losses are likely to continue, especially as the frequency of forest fires increase. He wrote: "It will be many years until we know the final tally from BHE's forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states." Edward Jones analyst James Shanahan said the wildfire losses could be a considerable headwind for Berkshire Hathaway Energy, which he noted has grown to be roughly 10% of revenues and earnings for the conglomerate. "I think these wildfire losses could be quite large, and could be a significant earnings headwind for the energy business for the next couple of years," he said. Still, CFRA's Seifert, who has a buy rating on the stock, said the wildfire risk is "ultimately manageable" given the size and scale of Berkshire. Meanwhile, Seifert expects railroads, which demonstrated some weakness last year amid wage negotiations, are "stable." Geico Another potential area to monitor is Geico, Edward Jones' Shanahan said. The auto insurer considered Buffett's "favorite child" reported a profitable year in 2023, and can benefit from ongoing tail winds in the insurance business. But the analyst worries that the firm's loss of market share to competitors such as Progressive bears watching. What's more, he said much of Geico's improved underwriting margins has to do with cuts in advertising spending, as well as a headcount reduction. "I think that's a very fair question for the meeting," Shanahan said. "I'm hopeful someone asks a question about the Geico unit, about how much we can expect advertising spend to increase, which again would be a headwind for underwriting margins for Geico." "If they were to invest in policy acquisition, that has near-term implications for loss costs, historically," Shanahan said. Bull case Still, analysts remain positive on the outlook for Berkshire. CFRA's Seifert, for example, has a buy rating on the company. Her 12-month price target of $472 implies Berkshire shares can climb roughly 18% from Thursday's closing price of $400.60 per share. She noted that many of Berkshire's businesses are likely to benefit from an interest rate cut by the Federal Reserve. "I think it's safe to say that interest rates are stable," said Seifert. "And, in a stable-to-declining interest rate environment, a lot of Berkshire's economically sensitive businesses should do reasonably well." On the other hand, Shanahan has had a hold rating on Berkshire since September, saying he is looking for a more attractive entry point to get back into the name after its outperformance. "We like the company and it's a name we'll probably come back to at some point, especially if we wanted to reposition one of our strategies more defensively, but it remains hold rated," Shanahan said. Ultimately, however, when it comes to the future of Berkshire Hathaway, investors anticipate the conglomerate is well positioned given its attractive and diverse mix of businesses, its strong balance sheet and cash reserves, and the culture of stewardship fostered at the company. "I think that the future is very bright for Berkshire Hathaway," Shanahan said. This year's so-called "Woodstock for Capitalists," held in Omaha, Nebraska, will be exclusively broadcast and live streamed by CNBC. Our special coverage will begin Saturday at 9:30 a.m. ET.