"Is it too late for me to invest in Berkshire Hathaway class B shares since they have run up so much already?"
That's the question from a reader that USA Today's Matt Krantz tackles in his daily column this morning.
Berkshire's Class B shares ($3295 each this morning) are designed to sell for roughly 1/30th the price of Berkshire's flagship Class A shares ($100,400 each today.) That puts the purchase of at least a small number of shares within the reach of individual investors.
While Berkshire's B shares are up 43 percent from their closing low of the year of $2300 on March 5, Krantz notes their 3 percent gain for the year-to-date is underperforming the benchmark S&P's 16 percent advance.
Krantz writes, "The gap will take quite a rally in Berkshire to close. Clearly, Buffett has a solid long-term record, and may come racing back, but assuming that he can always beat the market isn't a safe assumption."
Krantz also looks at Berkshire using four of his usual tests:
- Risk vs Reward .. PASS. Over time, Krantz says, Berkshire's high returns have made up for its "moderate" risk, which is 48 percent more than the S&P's long-term risk.
- Discounted Cash Flow .. NEUTRAL. Analysis shows Berkshire's "current stock price is roughly equal to what the company is expected to generate in cash over its lifetime," making it "fairly priced."
- Current Valuation vs. Historical Range .. FAIL. Krantz says that analysis puts Berkshire well into the "sell" range, a "red light for investors who believe the stock's valuation will remain close to historical averages."
- Financial Health .. NEUTRAL. Krantz uses his newspaper's Stock Meter, which gives Berkshire a "middling 3.3" rating on a scale of conservative (1) to aggressive (5).
His conclusion: While investors are historically gone very well with Berkshire and Buffett, the stock's "run this year ... has been disappointing" and "valuation isn't all that compelling" unless profits rebound strongly at Berkshire's subsidiaries.
"If you invest in Berkshire, you might want to heed the constant reminder issued by Buffett: Be patient. You might find yourself holding the stock for a while before you see why Buffett is so famous."