Advisors ditch most-celebrated stock ever?

With the markets looking inflated, a growing number of finance professionals say paying 140% of book value for a stock with mediocre returns is simply not in the client’s best interests – even if it’s…

It’s what IBM was to investors in the 60s, 70s, 80s and even the 90s, so why are some industry players asking clients to sell it?

Toronto Star business columnist David Olive published an article Friday recommending readers sell Berkshire Hathaway stock. In Olive’s opinion the stock is extremely overvalued trading at a 41 per cent premium to book value; its best days are behind it.

But are they?

“I’m not surprised by this report, I liked it at 75-100k, but not now,” RBC Dominion Securities advisor Greg Hall told WP in an email. “When you break out the pieces of Berkshire (Coke, IBM etc.) I believe if one were to own the basket of those same stocks the investor would outperform Berkshire.”

Buffett’s on record stating he will only buy Berkshire Hathaway stock when it’s trading for 120 per cent of book value or less, which prevents one of the best investors of all time from buying his own stock. At least from this perspective Olive is correct. After all it’s hard to bet against the Oracle of Omaha.

Buffett, of course, is speaking about the price he’d pay to repurchase stock. Never a big believer in stock buybacks, Buffett’s 120 per cent ceiling (was previously 110 per cent) is really meant to avoid overpaying as so many public companies are known to do when buying back their own stock. Capital allocation is critical to Berkshire Hathaway’s success.  

Valuation aside, Olive sees Buffett’s public statements about how Berkshire Hathaway’s become a “sprawling conglomerate” in recent years as proof positive that it’s lost its way. Whatever playbook existed for the company has long since been discarded Olive maintains.

Olive provides no less than 15 examples of stocks that have outperformed Berkshire Hathaway (up 84 per cent over the last five years) including Dollarama which generated a five-year return well over 500 per cent and almost seven times better than Buffett’s baby.

Case closed? Not quite.

New York hedge fund manager Whitney Tilson pegs the intrinsic value of Berkshire’s Class A shares at $275,000 and $305,000 a year from now. Currently trading around $213,000, an investment today would generate a 43 per cent one-year return for investors based on the sprawling conglomerate meeting Tilson’s projections.

“Buffett is doing a good job investing – the latest examples being Precision Castparts and Kraft – but the cash is coming in so fast (a high-class problem)!” wrote Tilson in an August presentation. “Berkshire will generate free cash flow equal to the $32 billion paid for PCP in approximately 20 months.”