There are many parallels to the end of the dot-com bubble. It is time to get out of expensive growth stocks and into cheap value stocks. One of these cheap value stocks is Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B). While the most popular growth stocks have driven the S&P 500 higher in recent years, Berkshire has badly underperformed. Berkshire has trailed the S&P 500 by 35% since the start of 2019. That is one of the worst 2-year relative performance stretches in the history of the company.
But do not look back. As a long term stock investor you have to look what is ahead of you. In the two years heading into the end of the dot-com bubble, Berkshire Hathaway massively underperformed the S&P 500. In the late 1990s, the media was full of stories about Warren Buffett having lost his Midas touch. When the bubble popped and technology stocks crashed, day traders who speculated on expensive tech stocks were wiped out. Berkshire then massively outperformed. In the 3 years following the dot-com crash, Berkshire beat the S&P 500 by 70%!
Now here we are, 20 years later, with a remarkably similar situation and there are 4 main reasons why Berkshire Hathaway will probably wildly outperform the S&P 500 over the next years:
1. The S&P 500, dominated mainly by Big-Tech stocks was never more expensive than it is today. Eventually, valuation matters! From a historically high valuation, the S&P 500 has limited upside potential. At roughly 1.2 times book value, Berkshire Hathaway has rarely been more attractively valued. When the cycle finally turns and the market once again starts appreciating value, shares of Berkshire Hathaway are going to be one of the first places money starts flowing.
2. Warren Buffett is repurchasing billions of dollars’ worth of Berkshire shares.
3. Many of Berkshire’s operating subsidiaries are sensitive to the U.S. economy. Berkshire’s earnings are going to soar as the vaccine rollout allows economic growth and this makes Berkshire a great post-COVID-19 trade.
4. Berkshire is now sitting on a huge amount of cash. $150 billion to be precise, and Buffett is always on the lookout to deploy it wisely. If Buffett can put this cash to work, it could immediately provide a big boost to Berkshire’s earnings.
Its cash and extremely strong balance sheet probably make Berkshire the safest stock to own in the entire stock market. In a historically expensive market, “safe” sounds good to me.
Sven Franssen