Leeb: My Favorite Stock

04/04/2003 12:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

From our special issue on Warren Buffett (see archives for two issues ago) one can readily see that he is among my favorite investors, businessmen, and general celebrity personalities. He, like Bill Gates, also places at the top of my favorites list as both consider bridge their favorite pastime. Buffett once quipped he could live in a jail cell if his cell mates were good players. Personal Finance senior editor, Stephen Leeb has some other reasons for liking Buffett.


“When it comes to advising you on investments, our cardinal principle is diversification. Don’t put all your eggs in one basket. But, if we had to pick just one stock to buy for long-term growth, the choice would be easy: Berkshire Hathaway (BRK.b NYSE). While many may consider this stock, trading above $3000 to be expensive, we would also note that the class A shares trade at a 30-1 ratio, or roughly $100,000 per share.  Meanwhile, in our view, this stock stands head and shoulders above all other possible picks because even in today’s uncertain world, it’s hard to come up with a scenario, however dire, in which Berkshire’s underlying values don’t increase. Over the long haul, a stock’s price almost always keeps up with its value, so a long-term uptrend in the stock price seems nearly assured. Over the shorter term too – one to five years – Berkshire is also one of our top picks due in large part to the companies tremendous earnings momentum plus its extraordinary balance sheet, which makes it a natural star in a world where quality has become less in supply and more in demand.


“Why do we sing the praises of this company so loudly? For starters, there’s Warren Buffett, who has been at the helm since 1965. Since then, the company’s book value has risen at a remarkable annual compounded rate of 22.2%, more than double that of the S&P. For many years, Buffett’s success resulted from his ability to pick stocks and time out above business cycles. But in 1988, Berkshire merged with the world’s third largest reinsurer, General Re, leaving the new company with one operation that really stood above all the others: property and casualty (P&C) insurance. Two factors are critical in the P&C business – its balance sheet and the skills of its management. On both counts, Berkshire was and remains a mile ahead of the pack. Berkshire’s high capital base of $60 billion is more than 10% of the base of the entire industry and more than 50% of the combined capital of its three largest competitors.


“What’s Berkshire worth? A lot more than it current stock price. Berkshire’s book value growth has outpaced the market by about 100%.  Even more than the numbers, is the consistency. Only once during the past 38 years did Buffett lose money.  Perhaps most amazing is that in four of the five years in which stocks suffered double-digit losses Buffett made money and for those five years as a whole he had a compound gain of more than 35% while stocks lost 72%.  Clearly, Berkshire is worth a tremendous premium to the market for both its exceptional growth prospects and its record of protecting investors when times go bad.  Yet by most measures - earnings, book value, and cash flow – the stock trades at a discount or at least no premium.”

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