One of Berkshire’s most profitable investments is becoming a risk.
Investing legend Warren Buffett has put his life’s work into building Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.35%) into one of the world’s largest corporations. The gigantic holding company houses Buffett’s private businesses, like GEICO insurance, various railroads and energy companies, and a stock portfolio worth hundreds of billions of dollars.
Ultimately, buying and holding Berkshire Hathaway has always been a great decision. The stock has returned a mere $1,000 investment into over $2.1 million since 1980.
But what about now?
Buffett has effectively built Berkshire Hathaway to last forever. However, investors should consider a growing risk within the stock.
Here is what this Fool is concerned about and whether it should keep investors from buying the stock.
Berkshire’s secret to massive investment returns
Berkshire Hathaway is a holding company that owns individual businesses. These businesses function independently, but their profits go toward Berkshire Hathaway’s bottom line. Berkshire reports its various assets in three distinct groups: one for its railroads, utilities, and energy businesses; another for GEICO and other nonindustrial businesses; and one for Berkshire’s investment portfolio.
Collectively, Berkshire holds dozens of entire businesses and partial stakes, all insulated by a fortress-like balance sheet that currently has $189 billion in cash and short-term investments. The company is remarkably diverse and features many recession-proof businesses, like insurance, railroads, and utilities.
Berkshire takes all the profits from these various businesses and reinvests them into the company. That could mean acquiring new businesses or investments or repurchasing its stock. The company doesn’t pay a dividend. Following this plan for decades has made Berkshire Hathaway the buy-and-hold rock star that it is. In a way, the company exemplifies how individuals should model their investment strategy.
Is Berkshire Hathaway’s Apple stake a problem?
Berkshire bought a stake in Apple (AAPL 1.30%) in early 2016. It has arguably been Berkshire’s most profitable investment. Apple stock has appreciated a staggering 765% since 2016, multiplying Berkshire Hathaway’s stake.
Today, Berkshire Hathaway’s Apple investment is worth approximately $179 billion, roughly a fifth of Berkshire Hathaway’s entire market cap. In other words, Apple has become a sizable portion of Berkshire’s market value.
The problem is that a dramatic decline in Apple stock could impact Berkshire, too. Despite Apple’s growth during that time, the stock’s valuation has fueled much of those returns. Buffett began buying Apple at around 12 times earnings. Today, Apple’s P/E ratio of over 35 could be prohibitively expensive, given its lack of growth in recent years.
AAPL PE Ratio data by YCharts
Fortunately, Berkshire began trimming its Apple stake. It reduced its position by 13% in the first quarter of this year. Investors should hope Buffett continues trimming to lock in a hefty profit while reducing Berkshire’s overall exposure to a potential share price decline.
Should investors buy the stock?
The Apple factor is important, but investors shouldn’t panic. After all, even a 50% decline in Apple stock would translate to a roughly 10% decline in Berkshire Hathaway’s market cap. Berkshire Hathaway stock has declined at least 20% from its high twice since 2020, simply due to broader market volatility.
Berkshire Hathaway stock trades at roughly 1.9 times its book value, on par with its average over the past 10 years. Berkshire Hathaway has grown larger over time, but it’s hard to say the company’s outlook has changed much. Berkshire Hathaway is about as solid as they come.
If its long-term valuation is a baseline for fair value, investors have reason to buy shares today. Buffett himself supports buying wonderful companies at a fair price. To me, Berkshire Hathaway is the perfect stock for dollar-cost averaging. Buying shares here and there will let investors slowly build a position while taking advantage of market volatility when it offers up shares at a discount.
There is no sale today, but Berkshire Hathaway is arguably fairly valued, and that’s all you need.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.