Would You Buy Berkshire Now? Here's Why You Shouldn't

Media talking heads love to rave about stocks that just ran up sharply. Rather than question whether that makes them expensive or overpriced, they typically try to justify the moves. The headline below, following Berkshire's March 29 run to north of $362 per share, is the epitome of that type of story. Berkshire is one of the world's largest-cap stocks. It is extremely widely held. The way to avoid getting sucked in, or dissuaded to sell, at the top is to perform a rational analysis and figure out what the stock in question is really worth. Warren Buffett feels that Berkshire should be valued on a price-to-book value basis rather than on price-to-earnings because of the cyclical and volatile nature of the insurance businesses under its control. Except for the past few years, his policy on share buybacks of Berkshire Hathaway was limited to periods when the shares sold for no higher than 120% of book value. What is the normalized price-to-book value for BRK.B? In the full decade ended Dec. 31, 2021 the stock averaged just below 125% of book value. Six of its seven best buying opportunities (green-starred below) occurred when the shares were available below that average ratio. The highest P/BV of those ranged from a low of 0.83-times BV, at the Covid-panic low, to 1.12-times BV at the low during 2017. Conversely, the two should have sold moments during 2014 and 2018 for BRK.B each took place with P/BVs at from 155% to 159%. BRK.B's March 29 new high came in at an absurd 1.95-times projected year-end 2022 book value. That certainly represented a two to three standard deviation to BRK.B's normal range. Anything is possible, but the statistical probability of the shares getting more overpriced are a tiny sliver of the chances that it will regress toward the mean. Here's a look at what took place after BRK.B got overheated much less than it remains today. In the 14 months following its December of 2014 peak Berkshire dropped 19.2%, while paying no dividends for your time. At the February 2016 nadir investors were able to get long the shares for just 106% of book value. That set them up for nice gains. By November of 2018 BRK.B was once again at an extended valuation of 159% of book value. Those who didn't exit, or bought on momentum, suffered an almost 29% decline over the next 16 months. The Covid-panic low proved to be the best entry point in a long, long time. BRK.B was offered for just 83% of book value if you caught the exact bottom. That set up new buyers for an eventual 127% paper gain at the recent new high. From almost twice book value, though, Berkshire is very likely to be a terrible performer going forward. A regression to a normalized P/BV suggests $232 or so is the proper price for BRK.B. Buffett's reputation and strong share price momentum has even professional research houses making unrealistic assumptions right now. Morningstar calls present day fair value as $350. I'm calling that crazy: It implies the shares will hold at 1.88-times year-end book value, about a 50.4% premium to its 10-year average P/BV. Even if you believe that projection, you must ask, Where's the upside on this non-dividends paying stock? Yahoo Finance is similarly overenthusiastic about BRK.B. It sees Berkshire weighing in at $345.50 by this time next spring. That assumes it maintains a 186% price-to-book value ratio. As with Morningstar, even if you buy that silly goal, why hold or buy it now, above that price? As of 12:34 p.m. on Tuesday, BRK.B was fetching $347.50. If you own either class of Berkshire Hathaway, you'd be well advised to sell while the price is outrageously out of bounds with the true worth. If you were thinking about buying in, think again. I welcome any responses from readers who think they can make a good case for holding/buying the stock right now. You know what they say about traders who cry, This time is different. Those who love Berkshire Hathaway will almost certainly get another chance to buy in much more cheaply before too long.

Would You Buy Berkshire Now? Here's Why You Shouldn't

Some may rave about Warren Buffett's Berkshire Hathaway rise, but it's the priciest valuation since 1987.

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