Berkshire Hathaway operating subsidiary NetJets has been on a shaky flight path, but Berkshire's own stock continued to climb ever-higher throughout the past week.
It was a watershed week for Berkshire Hathaway, with Standard & Poor's finally ending the rampant speculation about Berkshire being added to the S&P 500 Index, confirming that the historic marriage of the U.S. flagship equity index and U.S. flagship capitalist would indeed occur.
Berkshire Hathaway has set new 52-week high share prices in its B shares three times in the past two weeks. The first time, the new trading high in the Berkshire Hathaway B shares was attained on Jan. 21, when Berkshire shares finally eclipsed the $70 (U.S.) mark, finishing Jan. 21 at $72.72.
The first 52-week high was triggered by the 50-to-1 stock split in Berkshire's B shares, a move made to help finance the upcoming acquisition of Burlington Northern.
The 52-week high was no small feat, even for can-do-no-wrong-in-the-eyes-of-the-market Warren Buffett.
Consider this: Berkshire Hathaway shares hadn't broken through the $70 threshold, on an adjusted basis, since early August, when for a two-day period they traded above $70.
Now Berkshire Hathaway's B shares have finished above the $70 mark in four out of the past six trading days, through the close on Thursday. The second 52-week high in the Berkshire Hathaway shares was achieved on Thursday, when the shares finished at $73.75.
On Friday, Berkshire Hathaway shares were again climbing higher, up more than 4.5 per cent by mid-day Friday, to a price above $77 -- which was another 52-week high -- and as usual, Berkshire Hathaway shares were on pace to again set new high in trading volume.
After the close on Thursday, Berkshire Hathaway B shares' average daily trading volume was 4 million shares, but on Friday at midday, the Berkshire Hathaway volume had already reached the 7 million share threshold. On Wednesday -- S&P had announced late Tuesday afternoon its decision to add Berkshire Hathaway to the S&P 500 -- just under 20 million shares of Berkshire Hathaway were traded .
Technical traders have indicated that the $70 price target that Berkshire has managed to stay above for the past few days could be an indication that Berkshire Hathaway is a good stock to go long on, at least in the near-term.
How High?
Still, how high can the Warren Buffett stock climb, given its exposure to the U.S. economy and all the uncertainty surrounding the cyclical stocks within the Berkshire portfolio?
On Monday, Berkshire Hathaway experienced some market resistance, with its shares falling 1.3 per cent.
What's more, in marked contrast to last week when Berkshire traded up on several days when the broad equity markets were down, on Monday Berkshire was the one losing ground while the broad equity indexes gained. However, it is still important to note that from March lows, Berkshire still has 5 per cent to make up until it is in equilibrium with S&P 500 gains.
If you talk to the Buffett faithful, they will tell you that Berkshire Hathaway shares are undervalued by as much as 30 per cent to 40 per cent.
In fact, the legions of Buffett fans will point to the recent underperformance of Warren Buffett's investment company as the reason why now is the time to invest. Berkshire Hathaway significantly underperformed the S&P 500 in 2009.
For one, the insurance industry, which is a huge component of the Berkshire mix, has been a dog.
What's more, the big-cap U.S. companies that comprise Berkshire's publicly traded securities portfolio -- corporate elite stocks like Wal-Mart, Coca Cola, American Express, Wells Fargo and Kraft -- were left in the dust in 2009 by the resurgent small-caps. The operating subsidiaries that are wholly owned by Berkshire Hathaway, such as Clayton Homes, carpet company Shaw Industries and several jewellery companies, are all highly sensitive to U.S. housing and employment sectors, and consumer spending.
In the past two weeks, Warren Buffett also struck two big deals for his reinsurance business, making a significant increase of Berkshire Hathaway's stake in Munich Reinsurance, and buying a book of premium business from Swiss Re.
Resurgence Overdue
The Berkshire bulls say that it all points to a big resurgence in the value of Berkshire Hathaway shares, as the cyclically out-of-favor sectors that have led Buffett to outperform the S&P 500 by two-thirds in the past 15 years come back strong in the later stages of the economic recovery, and as Buffett can reinvest premium profits from his reinsurance business in higher-yielding assets.
That is, if the later stages of the economic recovery come sooner rather than later.
The past week has demonstrated a level of uncertainty in the markets, and in particular towards the U.S. economy and the U.S. employment outlook, that does not necessarily inspire the "all-in wager on the U.S. economy" which Buffett has made.
The markets were back up on Friday, but had been down for much of the week.
Still, Berkshire Hathaway -- even with its U.S. economy-centric profile -- was trading like its own animal in the past week.
On several days when the markets were down, and uncertainty about the U.S. recovery and job growth sent U.S. indexes into declines, Berkshire Hathaway shares kept going higher. Friday was again reflecting this disconnect between the U.S. market outlook and Berkshire's trading, with the big U.S. indexes close to flat on Friday while Berkshire continued its share price ascendence.
The feeding frenzy in Berkshire shares was given further bait late on Thursday when Berkshire Hathaway announced that it would not issue any additional shares due to the S&P 500 inclusion. It is common for companies to do an "index add" of common shares after they have been added to the S&P 500.
Of course, some market watchers say that the recent surge is simply a reaction to the fact that every index fund in the world benchmarked to the S&P 500 will now have to add Berkshire Hathaway to its portfolio mix. However, since the S&P move was long anticipated -- and there have been several academic studies indicating that stocks added to the S&P 500 get a big bump -- could the market have really completely missed this until after S&P made its announcement?
Is the surge in Berkshire Hathaway shares just the type of irrational exuberance, spurred by crowd psychology, that would irk a patient value investor like Warren Buffett. Or is the rise in Berkshire Hathaway's share price here to stay, maybe set to go still higher?