Does Berkshire Hathaway Have a Bright Future?

With shares of Berkshire Hathaway (NYSE:BRKB) trading around $113, is BRKB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Berkshire Hathaway is a publicly owned investment manager. Through its subsidiaries, the firm primarily engages in the insurance and reinsurance of property and casualty risks business. It is also involved in a freight rail transportation business, a group of utility, and energy generation and distribution businesses. Berkshire Hathaway was founded in 1889 and is based in Omaha, Nebraska.

Berkshire Hathaway, Warren Buffett’s conglomerate, has made a profit of $10 billion thus far from investments made during the financial crisis, according to the Wall Street Journal. Berkshire invested a total of $26 billion in six different companies during the crisis, including Mars Inc., Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), Swiss Re Ltd., Dow Chemical Co. (NYSE:DOW), and General Electric (NYSE:GE). Last week, Berkshire collected a $4.4 billion payment from Mars subsidiary Wrigley. “In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period,” Buffett said in an interview Saturday.

T = Technicals on the Stock Chart are Mixed

Berkshire Hathaway stock been trending higher in the last several years. The stock is currently consolidating near all time high prices as it digests gains from a recent run. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Berkshire Hathaway is trading between its key averages, which signal neutral to price action in the near-term.

BRKB

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Berkshire Hathaway options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Berkshire Hathaway Options

20.80%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Berkshire Hathaway’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Berkshire Hathaway look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

46.81%

51.42%

49.34%

71.96%

Revenue Growth (Y-O-Y)

15.95%

14.99%

17.82%

21.67%

Earnings Reaction

N/A

N/A

N/A

N/A

Berkshire Hathaway has seen increasing earnings and revenue figures over the last four quarters.

P = Average Relative Performance Versus Peers and Sector

How has Berkshire Hathaway stock done relative to its peers, Allstate Corp. (NYSE:ALL), BlackRock (NYSE:BLK), General Electric (NYSE:GE), and sector?

Berkshire Hathaway

Allstate

BlackRock

General Electric

Sector

Year-to-Date Return

26.39%

28.88%

29.92%

14.29%

24.61%

Berkshire Hathaway has been an average relative performer, year-to-date.

Conclusion

Berkshire Hathaway is an investment manager with a variety of investments in a number of industries. It is being reported that the company made significant gains from investments during the Financial Crisis. The stock has been flying higher in recent years and is now consolidating near all time high prices. Over the last four quarters, earnings and revenues have been rising. Relative to its peers and sector, Berkshire Hathaway  has been an average year-to-date performer. Look for Berkshire Hathaway to OUTPERFORM.

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