Paul Larson is an equities strategist for Morningstar and editor of the company’s flagship stocks newsletter, Morningstar StockInvestor. As part of his role as editor, he manages two stock portfolios--the Tortoise Portfolio, which is designed for conservative stock investors who embrace slow and steady growth, and the Hare Portfolio, which is designed for those who can handle more volatility. In the fall of 2005, Morningstar launched its first workbook series on stock investing, which Mr. Larson edited. The Morningstar Investing Workbook Series: Stocks is a sequence of three workbooks that guide readers through every stage of stock investing, from understanding the basics to refining a retirement portfolio. The workbooks are offered independently but designed for use sequentially. Mr. Larson joined Morningstar as a stock analyst covering the energy sector in 2002, and, in 2004, he was named associate director of stock analysis for the energy sector. Previously, he spent more than five...
Many of the opportunities in the current bull market may have run their course, but Paul Larson argues this very well-known stock is a surprisingly good value right now
Does this bull still have legs? We’re here with Paul Larson, who’s going to talk to us about whether the bull market is still charging ahead or whether it’s stalled and sitting out in the pasture at this point.
Well, thanks for having me. You know, it’s interesting when you look at what stocks have actually done. We are in a raging bull market at this point in time. It may not feel like it, but when you look at the numbers there’s no arguing. We’re in our fourth straight calendar year of gains.
For better or worse, a lot of the bargains that at Morningstar were seeing earlier in the year as well as two and three years ago, a lot of those bargains have evaporated. They’re opportunities that have already been realized. So there are select bargains out there in the market, but they’re further and fewer between than we’ve seen in a long time.
So it’s becoming a stock picker’s market. I find it interesting that we’re in this bull, but people need to keep reminding us because it doesn’t feel like it. Usually in a four-year bull market everybody would feel great, but it feels so grinding and hard even though it’s been a pretty amazing recovery.
Right, and I think it’s just the nature of where we’ve been over the last couple of years with the global financial crisis and the extreme volatility he had in 2008 and 2009. Then following that, we’ve had flash crash and then last summer’s volatility with the debt-ceiling debate and this overhanging European crisis and the fiscal cliff.
I mean there’s certainly no shortage of worries that we have in this market right now. But as all bull markets do, we’re climbing that wall of worry, so to speak, and stocks have done quite well.
Yeah. What do you like out there? I mean, where do you look now that all the bargains have been snapped up? And even though we’re fairly valued, I’m assuming there’s been a flight to safety, the risk-on risk-off stuff. Most people that stayed risk-off, all those stocks are fully valued I’m sure, so where do you look?
Well, one of the stocks that I like—because at Morningstar we’re a bottom-up shop, so all we do is look companies on a one-by-one basis—and one of the companies that does look undervalued that is relatively low-risk is Berkshire Hathaway (BRK.B).
Our fair-value estimate for this particular company is $110 on the B shares versus the stock price in the low 80s. And our fair-value estimate equates to about 1.5 times book, which is where the company has historically traded, where today it’s only trading at 1.2 to 1.3 times book.
So for a relatively low-risk name like Berkshire Hathaway with great diversity—obviously top-notch executives are running the firm in Warren Buffett and Charlie Munger—we think it’s a bargain.