Yahoo Finance Why Berkshire Hathaway Is Up 12% in 2018
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by legendary investor Warren Buffett, has performed quite well for investors in 2018. The stock is up nearly 12% so far this year, nearly doubling the S&P 500's 6.5% total return.
Not only have Berkshire's businesses performed strong this year, but the company's closely watched stock portfolio has also been doing quite well as a whole. Not only that, but Berkshire is also finally managing to put some of its stockpile of cash to work, and Buffett and Vice Chairman Charlie Munger have indicated they think the stock is attractively priced.
Image source: The Motley Fool.
Strong performance from the company's businesses
Berkshire's core business is insurance, and this segment of the company has performed quite well in 2018. In the most recent quarter, Berkshire's insurance businesses earned a $1.68 billion profit, a sharp contrast to last year's disaster-fueled loss.
Berkshire's other business segments are performing well also. BNSF, the company's railroad business, increased pre-tax earnings by about 10% year over year. Industrial products, which includes Precision Castparts, Lubrizol, and more, saw pre-tax profits increase, and Berkshire's service and retailing businesses experienced an impressive 25% jump in pre-tax profits. When you factor in the benefits of tax reform, Berkshire's operating profit doubled on a year-over-year basis in the third quarter.
Berkshire's stock portfolio has done well, for the most part
Of course, no discussion of Berkshire Hathaway would be complete without mentioning the company's roughly $200 billion stock portfolio. While there are more than 40 stocks in the portfolio, the majority of the value is concentrated in just five names -- Apple (NASDAQ: AAPL), American Express (NYSE: AXP), Bank of America (NYSE: BAC), Coca-Cola (NYSE: KO), and Wells Fargo (NYSE: BAC). (Note: Berkshire owns a big stake in Kraft Heinz (NASDAQ: KHC) as well, but it is accounted for under a different method.)
While the two big banks have underperformed, the others have delivered double-digit total returns for Berkshire. This is especially true for Apple, which is Berkshire's largest stock position by far. The tech giant has delivered a total return of nearly 23% so far in 2018, which has undoubtedly helped to fuel Berkshire's performance.
Company | Market Value of Berkshire's Stake | YTD Total Return |
|---|---|---|
Apple | $51.7 billion | 22.7% |
Coca-Cola | $19.9 billion | 11.5% |
American Express | $16.4 billion | 10.3% |
Bank of America | $19.4 billion | (1.8%) |
Wells Fargo | $24.0 billion | (9.7%) |
Data sources: Berkshire Hathaway SEC filings, CNBC.
Berkshire's cash stockpile is finally shrinking
Another encouraging sign for investors is that Berkshire has been successful in putting its cash to work in 2018. The company's cash hoard had been swelling for quite some time, peaking at $116 billion at the end of 2017. Buffett and Munger told investors that they were having trouble finding attractive ways to put the cash to work, and there was speculation that Berkshire could even start paying a dividend.
Fortunately, Buffett and his team have been able to put some of that cash to work. As of the end of the third quarter, Berkshire's cash stockpile has fallen to $103.6 billion. This is thanks to a major addition to the Apple stake earlier in the year, as well as several other key stock purchases over the past few quarters.
A change to the buyback program gave shares another jolt
Finally, investors were thrilled when Berkshire modified its share-buyback program. Previously, the company could only buy back shares when they were trading for less than 120% of book value -- a metric that hadn't been reached in some time.
Now, Buffett can buy back shares at any time when he and Munger agree that the stock is trading for a substantial discount to its intrinsic value. Berkshire repurchased $928 million worth of stock during the third quarter, which not only helps the company use its cash but also indicates to investors that Buffett and Munger think the stock is attractive.
More From The Motley Fool
Matthew Frankel, CFP owns shares of American Express, Apple, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
