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Berkshire Hathaway may seem to be a peculiar organization that cannot easily be pigeonholed into any sector. In its latest annual report dated February 26, 2022, it was stated:
It owns and operates more U.S.-based “infrastructure” assets – classified on our balance sheet as property, plant and equipment – than are owned and operated by any other American corporation.
Operations of its “Big Four” companies account for a very large chunk of Berkshire’s value: the insurance business, the company’s 5.55% stake in Apple Inc the railroad company BNSF whose trains traveled 143 million miles and carried 535 million tons of cargo in 2021, and Berkshire Hathaway Energy which is described as a leading force in wind, solar and transmission throughout much of the U.S.
Leading non-controlling stakes in financial services companies such as a 19.9% stake in American Express, a 13.3% stake in Moody’s, a 12.8% stake in Bank of America and an 8.3% stake in BNY Mellon.
Non-controlling stakes in leading companies outside of financial services and Apple include a 9.2% stake in Coca-Cola and a 7.7% stake in Chinese electric vehicle company BYD.
Outside of “market value” considerations, the company also has a $10 billion investment in Occidental Petroleum Corporation, a 26.6% interest in Kraft Heinz and a 38.6% interest in Pilot Travel Centers (also known as “Pilot Flying J”), the U.S.’ biggest operator of truck stops and travel centers.
Furthermore, despite the company’s “Big Four” assertion, it is clear that – in terms of earnings – the company’s mainstay has been its numerous investments:
Thus, it could be stated that, in its current stage, Berkshire Hathaway is essentially an investment management firm whose principals’ investment strategy can be bought into via the company’s shares – which is theoretically similar to being invested in any of Cathie Wood’s Ark Funds. The difference lies in the former’s concentration largely along classical businesses while the latter focuses predominantly on companies in the zeitgeist of “innovation”.
Share Classes Explained
In response to investor demands more than 20 years ago, the company’s stock is currently available in two share classes, with a few key differences:
The “Class A Common Stock”, which the company states will never face a stock split, is meant for investors focused on long-term profits. At prices currently around the $500,000 mark, it is one of the most expensive shares in the world. However, the stock’s holder can choose to convert each “Class A” share into 1,500 “Class B” shares.
The “Class B Common Stock” is priced more reasonably, trades more frequently and cannot be converted into “Class A” shares. However, each “Class B” share currently has 1/10,000th the voting rights of a “Class A” share.
Theoretically, given these differences, it stands to reason that an analysis of the 3 ratios similar to that executed in recent articles should show an exact match across both share classes. In reality, however, this isn’t quite the case.
The “A vs B” Factor – calculated simply by dividing the Class A Ratio by the Class B Ratio – indicates that there are instances when the Class B shares tend to be traded either at a (slight) premium or a discount relative to the Class A shares. There is an additional interesting point to note in the snapshot:
The seemingly-perfect Factor for the PE Ratio as of the end of March doesn’t quite imply a perfect price match across share classes. Since the Factors for the PS and PB Ratios are both below 1,500, this seems to be a minor rounding error from the data provider.
Given the PS and PB Ratios as of that day, it could be estimated that the Class B share traded at a slight premium relative to the Class A share. This is proven by actual stock prices recorded: as of closing on that day, a 1/1,500th “slice” of the Class A was 0.08% cheaper than the Class B.
On the 31st of May, the PE Ratio continues to show a perfect match across share classes while the Factors for PS and PB Ratios are 1,501.90 and 1,492.99. As of closing that day, a 1/1,500th “slice” of the Class A was 0.02% costlier than the Class B.
“Class A” Investor Behaviour TrendsIn 2017, the company’s Board of Directors has approved a common stock repurchase program for both Class A and Class B shares. While there were no purchases in 2017, this program has been running in subsequent years. While the number of Class A shares has reportedly decreased over the years, the number of Class B shares have increased. It is likely that a number of Class A holders have been exercising their right to convert to Class B shares. Assuming no other factors, the number of conversions that have taken place can be estimated thus:
There seems to be no overall trend between overall repurchases vis-à-vis conversions, which lends support to two arguments:
Some Class A holders have likely rationalized that holding Class B shares – and the inherent premium/discount trends – is marginally more preferable to holding the Class A shares.
It is likely that conversions were made in response to market conditions making it preferable to hold the Class B Shares, which is significantly more liquid.
Monthly Traded Volume: Trend Analysis
To evaluate the relative attractiveness of the company’s value proposition across the investor classes, lets define two terms purely for this portion of the analysis:
An “Exit” is defined as the instance when a month’s average traded volume (in units) is lower than that in the previous month.
A “Buy-In” is defined as the instance when a month’s average traded volume (in units) is higher than that in the previous month.
From 2019 till the present, it can be determined that trends in both share classes are in tandem more often than not:
While there are instances where the outlook among the two shareholder demographics have differed, this doesn’t lend itself to any particularly significant or even mid- to long-term differences in trajectory. Thus, the differences in ratios highlighted between the share classes have been relatively miniscule.
In relation to the benchmark S&P 500 index (denoted as “SPX”), there have been some very interesting developments in terms of stock performance in 2022:
While both stock classes can be seen to lag relative to SPX, the picture is very different this year. From the start of this year till the end of May, the S&P 500 is down by 13.85% while Class A is up by 4.35%. Class B, meanwhile, is up by 5.05%.
In ConclusionBerkshire Hathaway’s investments in classical themes such as energy and financial services (both sectors that are generally known to do comparatively better in inflationary/recessionary environments) are beginning to pay off. Furthermore, the company’s commitments in logistics and infrastructure – typically capital-intensive sectors – are also likely to have a steady payoff over the years. After all, it bears remembering that the company’s founders and principals have always preferred the marathon over the sprint: as indicated in the very first page of its annual report, while the S&P 500 had an overall gain of 30,209% between 1964 and 2021, the company’s gain was 3,641,613%.
It’s also interesting to note how relatively reasonable the company’s ratios seem in comparison to some of the biggest names in the “zeitgeist” of popular stocks. While the “ratio cool-offs” evident in most tech stocks that dominate most broad indexes continue, the company’s stock (be it Class A or Class B) is very worthy of consideration as a solid alternative to both broad market indexes and “tech stock” baskets such as Cathie Wood’s Ark Funds in these times.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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