Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A) stock has long been popular with individual investors as it lets them ride along with one of the most successful investors of all time, Warren Buffett . This popularity has paid off in recent years, with the stock up over 25% this year and more than doubling over the past five years.
However, with Buffett now in his 90s, investors may be wondering if the stock is a buy, sell, or hold. Let's take a look at each case.
The buy case for Berkshire
The buy case for Berkshire centers on the idea that Buffett has created a company that will long be successful well after he is gone. Although it's a conglomerate with investments in a variety of sectors, the heart of Berkshire's operations is still its insurance operations . Berkshire owns several insurance companies, including GEICO and General Re.
However, Buffett long ago put a unique spin on the insurance industry that has helped make Berkshire the company it is today. Insurance companies make most of their profits off their float, which is simply the money that insurance companies hold that hasn't been paid out in claims yet. If the premiums they collect are equal to claims they later pay out, insurance companies are essentially getting interest-free loans they can hold until they pay those claims.
Most insurance companies take a conservative approach and invest their floats in fixed-income securities such as bonds. However, Buffett took a much different approach and used the float to run his large stock portfolio. This has created superior returns over the years.
This model will stay in place once Buffett is gone, and he has a team in place to continue to make sure there is a smooth transition. Vice Chairman Greg Abel will be responsible for all investment and capital allocation decisions, while Vice Chairman Ajit Jain will run Berkshire's insurance operations. The company will also still have Todd Combs and Ted Weschler around to help manage Berkshire's investment portfolio, which they have been doing for more than decade.
Buffett has already transitioned a lot of power over, so the day-to-day operations should continue to run smoothly when he is gone.
Image source: Getty Images.
The sell case for Berkshire
Replacing one of the greatest investors of all time won't be easy. In addition, Buffett had a lot of leeway with the Berkshire board to get deals done, and companies were often very receptive to become part of Berkshire. There have already been some indications that there will be more dealmaking scrutiny when Buffett is gone.
As such, when Buffett is no longer at the helm, I would expect the stock to react negatively.
In addition, Berkshire stock is expensive by the traditional price-to-book (P/B) metric that investors often use to value insurance companies. For his part, Buffett previously used the P/B metric as a measure to help determine if the company should be buying back stock. He initially would repurchase shares when Berkshire stock was trading below 1.1 times book value and later upped it to if it was trading below 1.2 times. In later years, though, he said neither the P/B nor price-to-earnings (P/E) ratio were great measures of the company's intrinsic value.
That said, the stock is trading well above historical levels from both a P/B and P/E perspective at a time when Buffett's reign as CEO could be soon coming to a close.
BRK.B Price to Book Value data by YCharts
The hold case for Berkshire
The hold case for Berkshire stems from the acknowledgement that the stock may be a little pricey, but that the company will continue to increase its intrinsic value over the years and that Buffett has created an enduring legacy that will help Berkshire thrive even when he is gone. While Buffett cannot be replaced, his successors will still do admirable jobs that continue to move the stock in the right direction.
At the same time, despite being 94 years old, Buffett is still in charge and he may have several good years left still as the head of Berkshire.
The verdict
Given Berkshire's valuation along with Buffett's advanced age, I would view Berkshire stock as a hold. I think the company will be in strong hands after he leaves, but that it won't quite be the same when he is gone. I believe the stock will continue to be a solid long-term investment, but I would prefer to be a buyer on a dip.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy .
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