Betting on Buffett Over Bonds

07/26/2012 11:00 am EST


Paul Larson

Editor, Morningstar StockInvestor

Berkshire Hathaway shares have an upside of more than 25% while sovereign debt offers mostly risk, says Paul Larson, editor of Morningstar StockInvestor.

Is it a stock pickers market? Paul Larson thinks so. Paul, are stocks undervalued right now, do you think?

Well, according to us at Morningstar, we cover to close to 2,000 stocks, and looking at that large cohort of stocks, the median stock to us is looking about 10% undervalued right now. That’s not a screaming value in terms of the overall market, but the market does look moderately attractive today.

Is there one stock in particular that you like right now?

Sure. One of the stocks that I like is actually Berkshire Hathaway (BRK-B). I was just in Omaha for the tenth year in a row this past May, and this is a stock that is really looking quite cheap to us.

It’s trading at only about 1.15 times book value, and Warren Buffett said that he would be glad to buy boatloads of the stock at or below 1.1 times book value. So you’re really looking at a floor in the stock that’s quite high. Meanwhile, the potential upside is quite large. We think that Berkshire Hathaway, the B shares, are worth $100.

So right now, stocks are attractive relative to bonds?

Oh, absolutely. I think I'll repeat the joke that bonds look like return-free risk at this point in time, because you have sovereigns that have deteriorating credit profiles, and it looks like it’s only going to get worse from here.

Meanwhile, when you look at stocks, you can compare a long-term Treasury yielding 3% or 4% versus blue-chip dividend stocks that are trading at yields of 4% or 5%. And the dividend has the potential to increase, while the Treasury coupon does not have the potential to increase. I think that blue-chip stocks are really the better bet at this point.

Alright. Switching gears now on you, what’s your crystal ball say on the euro?

Well, I think that it’s anyone’s guess regarding what’s going to happen in that situation. We’re really in unchartered waters. There is no policy in the EU to actually have a country like Greece leave. So we’re really in unchartered waters.

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