Berkshire Hathaway, led by the legendary value investor Warren Buffett, has a long track record of beating the S&P 500. However, its performance has lagged the S&P 500 over the past decade. What’s the forecast for Berkshire Hathaway shares in 2021? Can Warren Buffett return to his winning ways?
Berkshire Hathaway shares underperformed the S&P 500 by more than 20% in 2019 and 18% in 2020. After the massive underperformance over the last two years, Berkshire Hathaway’s returns are now trailing the S&P 500 on a cumulative basis since 2010.
Berkshire Hathaway versus S&P 500
That said, if we look at a longer time period, between 1965 and 2019, Berkshire Hathaway shares increased at a CAGR of 20.2%, which is more than double the 10% delivered by the S&P 500. The returns for the S&P 500 also include the dividends. Berkshire Hathaway does not pay dividends, even though it collects billions of dollars of dividends every year from the portfolio companies.
But Berkshire Hathaway stock is outperforming the S&P 500 by a narrow margin in 2021. The outperformance began in the second half of 2020 as money moved from growth stocks to value stocks.
Berkshire Hathaway fourth quarter 13F
Last week, Berkshire Hathaway released its 13F for the fourth quarter of 2020 that showed the shares that it is holding in its portfolio. The company trimmed its stake in Apple. However, it remained the company’s biggest holding in the portfolio of publicly traded companies.
Warren Buffett had last brought Apple shares in the third quarter of 2018. Since then, the company has been gradually selling shares, including in the fourth quarter of 2018 when Apple shares tanked over 30%.
For that quarter, Berkshire Hathaway had clarified that it wasn’t Buffett but one of the other investment managers at the company who sold the shares. Ted Weschler and Todd Combs are the other two investment managers at Berkshire Hathaway but they manage a much smaller portfolio than Warren Buffett.
Since then, Berkshire Hathaway has sold Apple shares many times but it is not certain whether it was Buffett or one of the other two investment managers who sold the shares.
Warren Buffett surprised markets in the fourth quarter
Meanwhile, Warren Buffett made some surprise moves in the fourth quarter. Berkshire revealed an $8.6 billion stake in Verizon that it has been buying since the third quarter but it was kept as a secret. Buffett also added Chevron shares in the fourth quarter and the company held $4.1 billion worth of Chevron at the end of 2020.
Aside from these two companies, Berkshire Hathaway also added insurance broker Marsh & McLennan and held a $499 million stake at the end of 2020. Apart from these new purchases, the company increased its stake in Merk, RH, T-Mobile, AbbVie Inc, Kroger, and Bristol-Myers Squibb. However, it trimmed stakes in Wells Fargo in the fourth quarter. It fully exited JP Morgan Chase, Barrick Gold, M&T Bank, and PNC Financial Services in the fourth quarter.
Berkshire Hathaway’s fourth quarter earnings
Berkshire Hathaway is expected to release its fourth quarter 2020 earnings this week. In addition to the annual results, markets are also awaiting the annual letter from Buffett. Over the years, the Oracle of Omaha, as Buffett is known, has shared his wisdom with investors through the annual letters.
Analysts expect Berkshire Hathaway’s revenues to fall 1.7% year over year in the fourth quarter to $64.2 billion. Its revenues had fallen 3% and 10.6% respectively in the third and the second quarter of 2020. However, analysts expect the Warren Buffett run company to return to growth in the first quarter of 2021 and are forecasting revenue growth of 2.3%. For the full year 2021, analysts see the company’s revenues rising 7.7% as compared to 2020.
Warren Buffett on earnings metrics
While Buffett has expressed his disdain for earnings metrics like EBITDA (earnings before interest taxes, depreciation, and amortisation) several times, we’ll nonetheless use the metric for the company. The reason being, the net income is an even more distorted metric for a company like Berkshire as an accounting standard update mandates that it reports the unrealised gains and losses on the shares that it is holding. Last year, Buffett also cautioned against using its net income to judge the company’s performance. Analysts expect Berkshire Hathaway’s EBITDA to fall 8.3% in 2020 to $39.3 billion. However, they are projecting the company’s EBITDA to rise 14.3% in 2021.
Berkshire Hathaway buybacks
Amid the lack of buying opportunities, Warren Buffett has increased the pace of buybacks. In the third quarter of 2020, Berkshire Hathaway repurchased a record $9 billion of shares. In the first nine months of 2020, the company spent $15.7 billion on buybacks. Before 2020, Buffett has been quite frugal with buybacks even as he talked about a hypothetical $100 billion buyback in an interview in 2019.
In the fourth quarter earnings release, we’ll get more updates on how much did Buffett spent on buybacks. Nonetheless, 2020 was a record year for buybacks in history for the company.
Berkshire Hathaway has a median price target of $266.80 which is a premium of 8.9% over its current stock price. Of the four analysts surveyed by CNN Business, one rates the shares as a buy while the remaining three rate it as a hold or some equivalent.
Warren Buffett could play catch up with the S&P 500?
Meanwhile, after two years of massive underperformance, Warren Buffett might play a catch-up trade with the S&P 500. Firstly, as the economy picks up, we could see an uptrend in value stocks like Berkshire Hathaway. Also, the markets are currently not appreciating the massive gains that the company has made on its investment in Apple shares.
Secondly, while the broader US stock markets might appear overvalued after the spike, Berkshire Hathaway looks reasonably priced with an NTM (next-12 months) enterprise value to EBITDA multiple of 12.4x. While Buffett might have underperformed the markets over the last couple of years, we cannot count out the legend yet.
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Berkshire Hathaway, led by the legendary value investor Warren Buffett, has a long track record of beating the S&P 500. However, its performance has lagged...