We came across a short thesis on Berkshire Hathaway Inc (NYSE:BRK-B) on ValueInvestorsClub by amr504. In this article we will summarize the bears’ thesis on BRK-B. The company’s shares were trading at $460 when this thesis was published, vs. closing price of $451.10 on Jan 2nd.
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Berkshire Hathaway Inc (NYSE:BRK-B) is a holding company with a wide array of subsidiaries engaged in diverse activities, but with the core business being in insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group. The conglomerate, led by legendary investor Warren Buffett, is renowned for its history of delivering exceptional long-term returns by employing a disciplined value-investing strategy, acquiring diverse, well-managed businesses, and consistently reinvesting profits to compound growth, making it a cornerstone example of successful capital allocation.
Despite the exceptional history of long-term returns, the author proposes the thesis that Berkshire subsidiaries are not managed well, especially if compared to leading insurance peers like Progressive Corp. He argues that Geico has been crushed by Progressive in the last couple of years, which has been reflected through lower EBIT growth. The problem stems from a local management perspective and a low-cost strategy pursued by Berkshire subsidiaries. The author believes that the model that worked so well for most of Buffett’s career is not working today, and things are unlikely to change given his old age – while the low-cost operating model may still be relevant for a wide range of companies today, it is unlikely to be a good strategy given the fierce competition faced by Berkshire’s core insurance business. The company’s problem is further exacerbated by another important railroad business, Burlington Northern, chronically underperforming its closest peer Union Pacific for the same reasons.
The abovementioned argument, coupled with BRK-B trading at the higher end of its historical range, led the author to the conclusion that BRK-B is overvalued relative to the market. He does not give a precise stock price target though but argues that BRK-B might underperform vs. the broad market.
While we acknowledge the potential of BRK-B as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BRK-B but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.