A Wall Street Winner

03/26/2004 12:00 am EST

Focus:

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

"Warren Buffett once said that opportunity grows on the tree of patience," notes Elliott Gue, editor of  Wall Street Winners."He should know. It took time and many very wise decisions for him to build Berkshire, a large position in our own portfolio." Here’s his review.

"Since Buffett took over Berkshire Hathaway (BRK.A NYSE) in 1965, the company has compounded its book value an average of 22% annually since. Berkshire is a conglomerate in the making that spends around $4 billion a year on acquisitions while adding about $500 million in pretax earnings each year. In 2002, a great year for Berkshire, operating cash flows reached the extremely impressive levels of $11.2 billion—a very serious usable chunk of money by any measure.

"Looking at the company, the main reason for owning its stock is its ability to generate much better returns than the stock market as a whole. As our relative strength chart shows, Berkshire stock crushed the S&P 500, returning 23.3 percent per year for the past 16 years. The index only managed an annual return of 12.5 percent. Besides that performance, Berkshire has an extremely strong balance sheet, and a credible management team that offers transparency combined with careful and responsible management of shareholders’ assets.

"Keep in mind that Berkshire’s main goal is not to maximize quarterly earnings. Rather, it seeks the appreciation of stockholders’ value through solid investment moves. Believe it or not, with this company, time is the ultimate judge of the success of Buffett’s approach. In the last five years, Mr. Buffett saw the coming rise in commodities and the weakness of the dollar. Since 1998, he has been selling equities while buying energy and other assets at bargain prices all over the world. He also invested in free-floating foreign currencies early enough to take advantage of the greenback’s slide. During the same period, Berkshire stock returned 86% versus the 25% of the S&P 500, which looks meager by comparison.

"It’s well known that Mr. Buffett never looks at charts. In the case of Berkshire, though, charts also agree with fundamentals. Berkshire’s long-term chart is quite possibly the most bullish of any large-cap issue anywhere in the world. The most striking feature is that the stock is at all-time highs. While there are many smaller stocks near historic highs, Berkshire is the only stock in the world with a market cap above $100 billion that currently has that distinction. That’s no small matter when you consider that the S&P 500 still sits over 35% off its all-time high.

"On the downside, we feel the stock would find support on any dips toward 80,000. Given the length of the consolidation in the stock and the extreme relative outperformance it’s showing, this looks like the beginning of a major rally that’ll take the stock to over $105,000 per share in the next few years. This is simply the next leg higher for a stock that’s been in a bull market for decades. Investors can buy either the Berkshire Hathaway class A shares (BRK.A NYSE) or the less expensive, Berkshire class B (BRK.B NYSE). We have just added to our position in the stock in our portfolio and consider this a great buy."

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