Friday, August 5, 2011

What's Wrong With Analysts In One Line

Even though it is run by the best investor in the world, there are a few reasons not to like Berkshire Hathaway (BRK) as a stock.

Because of its size, Berkshire is limited in terms of its investment universe. As Warren Buffett has stated numerous times, Berkshire's returns in the future are likely to be lower than they have been in the past, simply as a function of the number of investments that can "move the needle" for Berkshire.

Furthermore, Buffett is over 80 years old. At some point, he will have to cede the reins to a less capable manager. That's no knock on the new manager, whomever he may be; it's just the result of the fact that the world hasn't known an investor as good as Buffett.

Perhaps as a result of these issues, Berkshire's stock trades at a rather low premium to book value, considering how quickly its book value has grown over the years. The stock trades for just 10% above Berkshire's book value, even though said book value has appreciated annually by an average of 20% over the last 45 years. This low premium to book value is a rarity for this company.

So what do the analysts have to say about the stock's prospects? Only four analysts cover the stock, and all of them rate it a "hold". If an analyst were to cite business reasons for the hold, they may or may not be correct, but at least they would be applying the correct criteria. But check out the reasoning behind Edward Jones analyst Tom Lewandowski's hold rating on the stock:

“It’s the cheapest that I’ve seen it in a while. It’s hard for me to get really positive on that.”

It's incredible to me that analysts are actually suggesting something that is cheap is undesirable as an investment, but based on how the market functions, it should come as no surprise. So much for buy low and sell high!

Disclosure: No position


Anonymous said...

FYI, it is "hand the reins over", not rains. Love the blog.

Paul said...

I really hope that guy was taken out of context. Wow!

Anonymous said...

I wouldn't touch it here versus the alternatives out there. i understand the analysts point. they are too big and cannot generate the big returns they did in the 80s. Many other great investors have much better records than him over the last 10-15 years, or even 20 years. His great days have long been gone. Buffet himself wouldn't have been buying a stock the size of Berkshire when he was young and running a small fund.

Anonymous said...

I read the article a few days ago and was struck by that too. But the article is full of tiny quotes, so it is hard to know how the conversation actually went. My guess it was a verbal conversation and there is an implied "but" in between. Maybe with a list of reasons as to his lack of excitement.

I like reading such articles but they are a terrible waste of time. I am going to do something more worthwhile now - read SEC filings!

Saj Karsan said...

Thanks, Anon1, I have corrected it.