While the stock market rallied a lot in 2019, Warren Buffett's conglomerate (( Berkshire Hathaway NYSE:BRK.A) NYSE:BRK.B), up only 11% versus the overall market's 31.5% gain, didn't have as great of a year. Of course, Berkshire did slightly better than the market in 2018, up 2.8% versus the S&P 500's 4.4% decline, as that year also ended with another huge crash in the stock market.
As of now, the market is still above those December 2018 lows, though Berkshire's stock has nearly fallen to the end-of-day low set on Dec. 16, 2018, when Berkshire's A shares closed at $288,000 -- just a hair below where shares are as of this writing. Interestingly, that same month, a big insider bought shares at prices even higher than Berkshire's current price.
On Dec. 18, 2018, Ajit Jain, the head of Berkshire's giant insurance business, bought $20 million worth of Berkshire A shares at a price of $296,515.01. Obviously, that's a very large buy, even for someone who is already quite wealthy, and shows a good amount of conviction in Berkshire's future, which some have doubted, since Buffett is 89 and his partner Charlie Munger is 96.
Jain himself is a potential CEO candidate, though many expect that in a post-Buffett Berkshire, Jain will stick to heading insurance and Berkshire Hathaway Energy CEO Greg Abel will oversee the operating businesses, with investing lieutenants Todd Combs and Ted Wechsler overseeing investments. To show that there is a bridge to the future, both Jain and Abel will accompany Buffett and Munger on stage at the Berkshire Hathaway annual meeting this year.
What's interesting is that Jain's purchase price is now above where Berkshire is currently trading, at $292,130 per A share as of this writing. So, does that mean you should back up the truck on Berkshire today?
Of course, there are some good reasons that Berkshire's stock is feeling the heat. After all, Berkshire owns a very large railroad, which could be hurt by falling volumes amid an economic slowdown. Furthermore, Buffett's ( main stock picks in recent years have been large U.S. banks, airlines, and even an oil bet with preferred shares of Occidental Petroleum NYSE:OXY). That stock has been crushed amid the oil rout caused by the Saudi-Russia price war, and the dividend has just been cut.
Buffett's concentration in banks and airlines certainly haven't served him well either over the past few weeks, with COVID-19 fears leading to a sharp decrease in air travel across a wide swath of the globe. Just last evening, President Trump instituted a travel ban on all passengers coming from continental Europe for 30 days.
Finally, Berkshire's bank bets have also soured, with interest rates plummeting and concerns over credit thanks to the oil crash and general coronavirus malaise.
Besides the obvious bad news, it's not as if all of Berkshire's stock picks are doing worse than the market. And besides, Berkshire has been piling up the cash on its balance sheet to the tune of roughly $125 billion, as of Dec. 31, 2019.
Buffett has taken some flack for holding on to Berkshire's cash and missing out on some of the tech-fueled gains the market experienced last year. However, that huge cash cushion is looking like quite an asset in times like this.
One can bet that Berkshire will be putting more of that cash to work soon, if not on new acquisition, then potentially on its own stock. Berkshire's stock now trades around 1.1 times book value, below the 1.2 times book value threshold that Buffett has traditionally pointed to as a limit for stock buybacks -- though even he relaxed that criteria in the summer of 2018.
If you'd like to stay invested in this bear market, but are worried about using up excess cash, buying Berkshire stock -- though most of us mortals can only afford the B shares -- allows you to put your money behind arguably the greatest investor of all time, along with his top-notch supporting team, who are sitting on a huge pile of cash available to invest. Thus, if torn between wanting to hold cash or nibble on undervalued stocks, buying shares of Berkshire is certainly a fine compromise. After all, Ajit Jain liked Berkshire shares above these levels more than a year ago.
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