Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has become one of the five most profitable companies in the world, driven by the company’s holdings in American blue-chip stocks. The company has great operating margins and invests in a range of equities — predominantly U.S. ones. However, fundamentally, I’m cautious of the premium attributed to U.S. stocks, and I don’t see much upside in a large part of the portfolio, and that’s why I remain neutral on Berkshire Hathaway.
The Berkshire Hathaway Success Story
Berkshire Hathaway has become one of the most successful and admired investment firms globally. The conglomerate’s success is built on acquiring companies with strong fundamentals, consistent earnings, and competitive advantages. This marks a change from the early days when Buffett appeared to focus more closely on deep value.
One of its most notable investments is Apple (NASDAQ:AAPL). Berkshire Hathaway began investing in Apple in 2016, recognizing its product ecosystem, loyal customer base (capacity to retain customers), and impressive cash flow. This investment has since grown to be one of Berkshire’s largest holdings — 40.81% of the entire portfolio. This clearly reflects Buffett’s confidence in Apple’s continued innovation and market leadership. Apple stock is up nearly 8x since the first Berkshire investment.
In addition to Apple, Berkshire Hathaway has made significant investments in major U.S. businesses, and Buffett has always touted the U.S. as his preferred investment destination. Coca-Cola (NYSE:KO), purchased in 1988, has been a staple of its portfolio and currently represents 7.38% of all holdings. Many analysts have pointed out that Berkshire’s original investment in Coca-Cola is now earning a staggering 59.7% yield.
Berkshire’s five-decade-long bet on America also includes major investments in American Express (NYSE:AXP) and Bank of America (NYSE:BAC). Both of these investments represent more than 10% of the total portfolio.
Buffett’s investing model is flexible, as demonstrated by early investments in Chinese automaker BYD (NASDAQ:BYDDF). However, it is worth noting that Buffett reduced his position in the Chinese EV giant. Buffett and Charlie Munger had expressed concerns about going against Elon Musk’s Tesla (NASDAQ:TSLA).
Buffett has also made significant investments in Japan in recent years, including trading houses that have been the darlings of the stock market since Berkshire’s first move in 2020. Meanwhile, Berkshire Hathaway’s investments in the UK and Europe have been very limited in recent years.
Can Berkshire Hathaway’s Success Continue?
Berkshire Hathaway’s portfolio also includes companies like GEICO, the second-largest insurer in the U.S., which is entirely owned by Berkshire. This means it can be challenging to make assumptions about the future of the business based on valuation data.
However, in terms of equity investments, around 75% of the portfolio is invested in Apple, Bank of America, American Express, Coca-Cola, and Chevron (NYSE:CVX). Personally, I’m concerned that these companies are already trading with elevated valuations and near their average price targets.
- Apple’s average price target is $219.96, inferring 3.45% downside versus the current share price. The company’s forward price-to-earnings-to-growth (PEG) ratio (my favorite metric) sits at an unattractive 3.23x.
- Bank of America’s average price target is $41.31, which implies 1.7% upside versus the current share price. The stock’s PEG ratio is relatively attractive at 1.31x.
- American Express’s average share price target is $239.35, inferring 2.1% upside versus the current share price. The stock’s PEG ratio is a relatively attractive 1.21x.
- Coca-Cola’s average share price target is $69, inferring 9.59% upside versus the current share price. The PEG ratio is 3.77x.
- Chevron’s average share price target is $186.21, inferring 20.66% upside versus the current share price. The PEG ratio is 2.81x.
You can see the analyst price targets more clearly below using TipRanks’ Comparison Tool.
These figures are by no means damning. Blue-chip stocks like these tend to trade close to or even above their price targets as investors attach a premium to quality and stability. However, I’d argue that none of the above data is particularly enticing.
Nonetheless, it’s hard to argue that Berkshire Hathaway as a whole is an unhealthy or unattractive investment opportunity. The company’s operating margin sits at 25%, it has cash reserves in excess of $51 billion, and boasts a 13% return on equity.
It’s also worth noting that while Berkshire Hathaway has returned an impressive amount of value to shareholders over the long run, over the past five years, it has only slightly outperformed the S&P 500 (SPX), at 88% vs 85%, respectively.
Is Berkshire Hathaway Stock a Buy, According to Analysts?
On TipRanks, BRK.B comes in as a Strong Buy based on three Buys, zero Holds, and zero Sell ratings assigned by analysts in the past three months. The average Berkshire Hathaway stock price target is $470.67, implying a 15.1% upside potential.
The Bottom Line on Berkshire Hathaway Stock
Berkshire Hathaway is among the most profitable companies in the world, with a portfolio of U.S.-focused investments that have driven growth over the past five decades. However, I’m personally a little concerned by the valuations of Berkshire’s top five holdings, which represent 75% of the equity portfolio. I don’t see much upside here, and that does worry me. So, despite the business’s excellent operating margins and cash pile, I remain neutral. I’m not sure the stock can push much higher for now.
