Barron's put the big, bold headline "Sell Buffett" on its cover late last December. At the time, Warren Buffett's Berkshire Hathaway had just closed at $143,000. The financial weekly predicted the stock would fall. It did.
Now, Barron's says worries about Berkshire's stock portfolio and stock index derivatives appear to be "overblown," creating "one of the better buying opportunities in years." (No big cover headline, however, this time around.)
In Finally, Berkshire Looks Undervalued, Senior Editor Andrew Bary writes that Berkshire's long-term put options on $37 billion of equity indexes "looks like a rare mistake by" Buffett, but "Wall Street seems to have overpunished the stock for the bet."
And, he notes that Berkshire has a triple-A credit rating and "loads of earnings power" thanks to its many businesses. "If the stock market rallies in 2009, Berkshire will probably see record profits" with help from "improving conditions" for its insurance units and the 10 percent a year it will get from investing a total of $8 billion in General Electric and Goldman Sachs.
Bary writes that Berkshire's stock price has been linked to its book value in the past. Barron's estimates it is currently around $66,000 a share. That means the stock is now trading at 1.4 times that estimated book value, "versus an average of around 1.5 in the past decade -- and current book is depressed. If the stock market rallies 25 percent in the next year, the stock could hit $110,000, or 1.4 times potential year-end '09 book value of $80,000 a share."
And if stocks don't rebound, Berkshire's "downside seems limited" due to its very strong balance sheet.
Current Berkshire stock prices:
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