Warren Buffett likes stocks. He began investing in stocks at age 11, buying three preferred shares of Cities Services. Through the years, he has amassed a multibillion-dollar fortune thanks to the performance of the many stocks he’s purchased.
What’s Buffett’s favorite stock of all? That’s an easy question. It’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), hands down. Most of the legendary investor’s net worth is tied to the stock of the conglomerate that he runs.
Some might argue that Berkshire isn’t as good of an investment as it used to be. However, my view is that it’s still a smart pick for long-term investors. Here’s the No. 1 reason to buy Buffett’s favorite stock right now.
The best reason to buy Berkshire
There are actually several reasons to consider investing in Berkshire Hathaway. One that immediately comes to mind is that the stock has been a huge winner over the long run. If you had invested $100 in Berkshire when Buffett took over in 1965 (and held on to your shares), your initial investment would be worth more than $2.4 million today.
Another good reason to buy shares of Berkshire Hathaway is the company’s diversification. Investing in Berkshire is almost like investing in an exchange-traded fund. The company has over 60 subsidiaries operating across a wide range of industries. It also owns equity positions in more than 40 other publicly traded companies.
We can’t leave out the appeal of profiting from the wisdom of Buffett and his longtime business partner, Charlie Munger. Even though a couple of other investment managers now make some of the decisions on Berkshire’s portfolio, Buffett and Munger are still actively involved in investing.
But there’s one reason to buy Berkshire Hathaway stock that stands out above all others. And it’s the only reason Buffett would buy shares. What is this No. 1 reason? Berkshire stock trades at a discount to its intrinsic value.
What is Berkshire’s intrinsic value?
The intrinsic value of a stock is what the stock is actually worth. So what is Berkshire’s intrinsic value? That’s a hard question to answer.
Buffett wrote to Berkshire Hathaway shareholders a few years ago that he thought that the company’s intrinsic value could be approximated by adding up the valuations of its key businesses and then subtracting the amount of taxes that would have to be paid on the sale of marketable securities that Berkshire owned. However, determining the valuations of Berkshire’s core businesses isn’t an easy task.
To complicate the matter further, Buffett also said in his 2018 letter to Berkshire shareholders, “At Berkshire, the whole is greater — considerably greater — than the sum of the parts.” He maintained that Berkshire’s ability to allocate capital, reduce enterprise risk, and reduce overhead (among other things) made the overall company worth more than the total valuations of its subsidiaries.
Analysts often build discounted cash flow (DCF) models to try to calculate a reasonable valuation for a stock. One recent DCF model for Berkshire Hathaway created by Alpha Spread determined the intrinsic value of the company’s class A shares to be around $504,550. This would make the stock nearly 8% undervalued right now.
Follow Buffett’s lead
Perhaps the best way to know that Berkshire stock is trading below its intrinsic value is to follow Buffett’s lead. He and Munger have the authority to buy back shares any time they believe that the current share price is below the intrinsic value using a conservative estimation.
Berkshire repurchased shares in the first, second, and third quarters of 2022. The stock is currently below the average levels from Q1 and much of Q2. I think that Buffett is almost certainly buying Berkshire Hathaway shares in 2023. He would only do so if he believed the stock was cheaper than its intrinsic value.
There’s no one on the planet who is better equipped to accurately assess Berkshire’s intrinsic value than Buffett. If he’s buying the stock, it’s likely a good reason for other investors to do so as well.
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Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.