Leeb on Berkshire Hathaway....
Stephen Leeb (editor of Personal Finance newsletter and owner of New York-based Leeb Capital Management) says:
"If we had to pick just one stock to buy for long-term growth, the choice would be easy: Berkshire Hathaway. This stock stands head and shoulders above all other possible picks because even in today's uncertain world, it's hard to come up with a scenario, however dire, in which Berkshire's underlying values don't increase.
That's due in large part to the company's tremendous earnings momentum plus its extraordinary balance sheet, which makes it a natural star in a world where quality has become less in supply and more in demand. Buffett's success has resulted from his preternatural ability to pick stocks and time business cycles.
Berkshire's major stake in P&C insurance assures the company's long-term future growth because two factors are critical to the success of any P&C company: its balance sheet and the skills of management. On both counts, Berkshire is miles ahead of the pack. The largest portion of Berkshire's insurance activities is reinsurance, which is a vehicle bought by insurers to hedge their capital exposure in the event of a major catastrophe. A reinsurer's strongest selling point is its capital base-obviously, there is not much point in trying to protect your capital by buying insurance from a company that might have problems paying off. Berkshire is the only AAA-rated reinsurer in the world.
The high credit rating barely begins to tell the story. Berkshire's capital base of over $60 billion is more than 10% of the capital base of the entire insurance industry and more than 50% greater than the combined capital of its three closest competitors. This extraordinary capital advantage provides Berkshire an unassailable position for the foreseeable future.
Insured disasters in the past year drained about 25% of the capital out of the industry, and one of Berkshire's closest competitors, Swiss Re, cut its dividend for the first time in nearly a century. Poorly performing financial markets are another source of capital drain for the industry as a whole.
Any event that drains capital from the industry hurts many, but helps those with the most capital because they gain a competitive advantage. Berkshire took a few hits in the past several years, but they were only glancing blows because they represented such a minuscule percentage of its massive capital base.
Berkshire's capital advantage is enhanced by the skills of management. Probably the best measure of insurance skills is how much the company pays for float. In many years...Berkshire's cost of float was often less than zero. This means the company was being paid for using other people's money to earn money in strong financial markets. This is as close as you come to coining money and only the keenest insurers can do this on a consistent basis.
What's Berkshire worth? A lot more than its current stock price. Berkshire's book value growth has outpaced the market by about 100% over the years, an annualized gain of 22% versus about 11% for the S&P 500.
Even more remarkable than the numbers themselves is the consistency. Only once during the past 38 years did Buffett lose money. Perhaps most amazing of all is that in four of the five years in which stocks suffered double-digit losses, Buffett made money-and for those five years as a whole he had a total compounded gain of more than 35%. During the same time, stocks lost 72%.
Clearly, Berkshire is worth a tremendous premium to the market for both its exceptional growth prospects and its record of protecting investors when times go bad. Yet by most measures-earnings, book value and cash flow-the stock trades at a discount or at least no premium. Buy Berkshire and buy aggressively for a first target of $100,000." |
