Our Analysis of Berkshire Hathaway Inc. (NYSE: BRK/B)

A few months ago, we began sharing our analysis of some of the most well-known and widely owned stocks.

We did so utilizing our "Quantamental" research approach, refined over three decades.

This approach combines "quantitative" analysis, which consists mostly of technical analysis, with "fundamental" analysis of the company's operating metrics.

We developed this approach in our thirty years as professional investors.

We have simplified our approach to three simple analyses that can cover 90% of the analysis of any individual stock.

We have primarily focused on the "Magnificent Seven" group of leading technology stocks to kick off this process. We also recently touched on athletic apparel company NIKE, Inc. (NYSE: NKE).

Today, we are going in an entirely different direction and going to look at Warren Buffett's investment vehicle, Berkshire Hathaway Inc. (BRK/B).

The stock recently hit an all-time high and joined the small group of companies with a $1 TRILLION market capitalization. Although it has a different structure than most companies we look to analyze, it still lends itself to our unique form of analysis.

One quick note: Berkshire has two classes of stock: the "A" shares, which trade for almost $700,000 for a SINGLE share, and the "B" shares, which trade for a bit more than $450 per share.

There are some technical differences between the shares, but each “A” share represents (and can be converted into) 1500 “B” shares. The "B" shares exist so regular investors can afford to buy into the company's shares.

This is less of an issue in today's world with fractional trading and other methods of getting involved, but it was a problem back in 1996 when the "B" shares were issued.

Our analysis is independent of the share class as they trade in line and represent ownership in the same company.

Our analysis below is not a formal recommendation on the stock. Based on our analysis, we are giving our views of what is most likely to happen from here in the short-term

Here is the analysis…

1. Technical Analysis

We start our analysis of a company but want to see if it has been a good stock in the long term.

Here is a chart of the stock price of BRK/B going back a decade…

We probably don’t have to tell you this, but Berkshire has been a great stock.

Look closely, though; you can see that it has gone through extended periods where the stock didn't do much.

Berkshire is different from the other companies we have examined in that it is less of an "operating" company and more of a "holding" company.

As opposed to owning one group (or a group of) operating businesses with clear operating metrics, it owns many disparate companies with different operating metrics. We will discuss this more below.

From a long-term momentum perspective, though, BRK/B has done very well.

We also want to look at the short-term momentum to think about the current entry point.

Here is a chart of the stock price over the last year, along with the "relative strength index" (RSI).

As we mentioned in our opening, the stock has been hitting all-time highs, so the near-term momentum has been outstanding.

Sometimes, though, when a stock has TOO much momentum, it becomes less attractive in the short term.

This happened with the first company we analyzed in the Quantamenal series: NVIDIA Corporation (NASDAQ: NVDA). We looked at the stock on July 16, as it was close to its all-time highs.

Our problem with the stock at the time was that it recently had an RSI of over 80. This indicates extreme enthusiasm, which can lead to short-term downside for most stocks.

The same can be said for Berkshire. It is even rarer for these mega-capitalization stocks to become that overbought, but that is what happened last week.

It recently traded above an RSI of 81.5, and we look back at the previous times it traded that high in the last decade. Here is that table…

Those are some terrible returns. This doesn't happen often, but when it does, the stock is almost always lower in a few months.

What is interesting about a low-volatility stock like Berkshire is that while most investors do not trade it based on technical analysis, when it does reach these exceedingly rare levels of overbought or oversold, the hit rates are exceptional.

We don’t see any reason why this time would be different, and, on this basis, we would not buy Berkshire stock right now.

TECHNICAL ANALYSIS = AVOID.

2. Earnings Revisions

Our view is that there is ONE single factor that has the greatest correlation to a stock price in the near term. That factor is EARNINGS REVISIONS.

This is true most of the time, but it is not the case for every stock.

In fact, Berkshire is the exception to this rule.

As a holding company, the metrics are different and not as "clean" as they would be for an operating company.

This may also surprise you, but there are very few analysts who cover the stock. Only seven cover the "B" shares, and only three have a "Buy" rating on the stock.

Due to the lack of coverage and the complexity of the financial metrics, we can't look at our favorite measure—earnings revisions.

However, we can still examine how their earnings reports compare to analyst expectations. Here is that table…

We don’t think it plays much of a role in the share price performance of Berkshire, but they do seem to have good operating momentum.

EARNINGS REVISIONS = INCOMPLETE

3. Earnings Growth

The final measure we focus on is the actual growth in the financial metrics.

We mentioned earnings per share above, and we DO think investors will take notice of Berkshire's EPS results over time. Here is the table of those results across the last decade…

Berkshire has done an excellent job over this period. Its EPS has grown by +200%, which is impressive for a company of this size and complexity.

Most analysts focus on one METRIC, though, for Berkshire: the "Book Value per Share."

This is an accounting metric that attempts to quantify the value of assets. As a holding company, Berkshire considers this metric more important than most other companies.

Here is how Berkshire’s Book Value per Share has grown over these last ten years…

The growth here mirrors the increase in earnings per share. This makes sense from an accounting perspective and is impressive for a company this size.

We think Berkshire has an admirable long-term record of value creation. This, along with the diversity of its businesses, its solid balance sheet, and Buffett's long-term acumen, is a big positive.

EARNINGS GROWTH = BUY

Conclusion

Right now, there are mixed signals for Berkshire.

Over the long term, we think the company is in great shape. It also has a huge pile of cash (almost $280 billion), and Buffet has an incredible track record of deploying that cash opportunistically.

We like the idea of him having that much capital to put to work.

TACTICALLY, however, the stock does not at all look attractive.

Remember that stocks are NOT companies. They are pieces of paper, which means they trade in the short term based on human psychology and the enthusiasm of buyers and sellers.

Historically, when the stock gets THIS overbought, it does very poorly in the coming months. We don't think this time will be any different.

Overall, we would avoid Berkshire stock right here.