Is Berkshire Hathaway Stock a Buy Now?

Key Points

• As of the beginning of next year, Warren Buffett will no longer be Berkshire’s CEO.

• His replacement Greg Abel seems to understand what makes Berkshire Hathaway so successful in the long run.

• Berkshire's stock portfolio is also being cleaned up as well as cleaned out, including one major overdue change.

• 10 stocks we like better than Berkshire Hathaway ›

Is it the end of an era for Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) reliable long-term market-beating performance? Could be. Warren Buffett -- who largely made the conglomerate what it is today since taking the helm back in 1965 -- will be stepping down as chief executive at the end of this year. Although he'll remain on as chairman, the stock's slump since the announcement was made in early May says most investors are concerned.

It's also difficult to ignore that he's leaving on a bit of a low note. Not only is the company's operating cash flow down 13% through the first half of the current year, but the 2015 merger of Kraft and Heinz into food giant Kraft Heinz (NASDAQ: KHC) that Warren Buffett himself helped orchestrate is now being (mostly) undone, reminding the world that even the Oracle of Omaha doesn't always get 'em right. Never even mind the fact that Berkshire's still sitting on more than $300 billion in idle cash simply because Buffett and his lieutenants don't see anything out there that's worth investing in. There's no clarity as to when they will, either.

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Just don't worry about any of it. Yes, Berkshire Hathaway is a buy right now, not despite the stock's recent weakness, but because of it.

Still in good hands

Change can be difficult, even for veteran investors. And this is a big change to be sure. Buffett's led Berkshire for 60 years; most investors won't be able to remember a time he wasn't in charge.

There's also no denying he's a bit magical when it comes to picking stocks, or even picking private companies to acquire. (Roughly one-third of Berkshire Hathaway's total value consists of privately held outfits like Duracell batteries, Dairy Queen, Geico insurance, railroad BNSF, Fruit of the Loom, and Pilot Travel Centers, just to name a few.) Now the company won't be able to readily access that magic.

Worrying that Berkshire's incoming CEO Greg Abel won't be able to replicate Buffett's long-term success, however, just isn't merited.

Abel's certainly been around long enough. He joined the Berkshire family back in 2000 when the conglomerate acquired utility service MidAmerican Energy, where he was serving as president. The longer Buffett was around him, the more he liked him. As Buffett commented back in 2013 before picking him as Berkshire's next chief (which wouldn't happen until 2021), "I always make time for Greg when he calls, because he brings me great ideas and is truly innovative in his thinking and business approach." Earlier this year Buffett added to his admiration by saying "I would leave the capital allocation to Greg and he understands businesses extremely well."

And as for his part, Abel also seems to understand that he's not taking over just another company. In May, the CEO-elect commented on his mindset regarding his future leadership of Berkshire "It's really the investment philosophy and how Warren and the team have allocated capital for the past 60 years. Really, it will not change. And it's the approach we'll take as we go forward."

In other words, operationally and allocation-wise -- and probably even performance-wise -- shareholders probably won't see or sense any real difference between the company's past and its future. Abel seems willing to use all the flexibility that Buffett enjoyed using during his tenure.

It would also be remiss to not suggest that investors as a whole will continue to see Berkshire Hathaway as a very-long-term investment, giving Abel the same time they gave Buffett to do what's smart rather than force him to sacrifice long-term performance for short-term results.

Pre-transition cleanup

There's never really a bad time to take on a long-term stake in Berkshire Hathaway, to be clear. There's a case to be made, however, for doing so sooner than later. It appears the proverbial slate is being cleaned as much as is feasibly possible for when Greg Abel takes the helm -- work that appears very nearly done.

Case in point: Although the stock fell following the news, in some regards the recently announced decision to split Kraft Heinz back into two separately traded entities will end the misery for what turned out to be a terrible trade for Buffett. Things may not get better from here, but at least they're less likely to continue deteriorating. It matters simply because Berkshire is still sitting on nearly 326 million shares ($8.5 billion worth) of the struggling stock that's the conglomerate's eighth-biggest stock trade.

The company's also been scaling back its total stakes in a handful of companies that arguably grew to be too big. It's more than halved its position in technology giant Apple (NASDAQ: AAPL) since 2018's peak, for instance. Yet, Apple is still Berkshire Hathaway's single-biggest position. Its remaining 280 million shares are collectively worth $64 billion, which is still a little more than one-fifth of the conglomerate's total stock portfolio -- a respectably sized trade in a company that's still rather promising. At the same time, it recently exited the entirety of its position in telecom name T-Mobile that was serving little purpose, and dramatically slashed its holding in struggling cable giant Charter. This year's activity is more than we've seen from Berkshire Hathaway in quite some time. It's activity, however, that's been arguably been overdue for a while just so the company can sharpen its focus.

And again, the cleanup may be nearly done.

The kicker: Don't dismiss the value of all the cash-generating private businesses that Berkshire owns, either. If any market correction or economic lull leads into a full-blown bear market, most of those consumer goods businesses will still continue to perform, contributing operating cash flow that bolsters the conglomerate's cash hoard. The fact that they're not publicly traded and are only collectively valued via Berkshire's stock price makes them wonderful defensive holdings that can shrug off broad market weakness.

But all that cash?

That being said, perhaps one of the top reasons to go ahead and dive into a position in Berkshire here is the cash hoard that a growing handful of people are complaining about. Or more specifically, what this cash pile reminds us about Berkshire Hathaway.

It's true that uninvested money doesn't grow. And the market has dished out plenty of growth as of late that Berkshire has seemingly missed out on. The market is also uncomfortably expensive here, however, leaving it vulnerable to a setback at even the slightest hint of economic trouble.

In a philosophical sense this is of no major concern to Warren Buffett, and presumably, not to Greg Abel either. As the Oracle of Omaha believes, "price is what you pay, value is what you get." If a company is worth owning for the long haul, it's worth paying a (reasonable) premium for it.

If you're mulling a position in Berkshire though, you are effectively deferring to Buffett's -- and now Abel's -- unvoiced judgment at any given time about what's best for its business in the long run. The fact that both men are OK with taking a little bit of heat or suffering some criticism for doing nothing with roughly one-third of the company's total value currently held as cash is the sort of discipline you want to see. Indeed, interested investors should embrace and celebrate the fact that Buffett and Abel stand ready with cash in-hand to act once the right opportunity finally surfaces.

That's how it happened back in 2008 with Bank of America, anyway. When no other outfit was willing or able to step up, Berkshire did. Less than a decade later, Buffett locked in a $12 billion profit on the position. Again, that's the kind of patient, disciplined thinking you actually want from Berkshire Hathaway's management even if at times it doesn't feel like that's what you want.

Buy it because Berkshire is bigger than Buffett

None of this is to guarantee an immediately strong performance from Berkshire Hathaway shares. You don't know when the application of Buffett's philosophy (in terms of picking stocks, but also in picking people to run Berkshire-owned businesses) will actually pay off for shareholders. You only know that -- given enough time -- the approach works no matter who's executing it. You want to get in, and then you want to stay in.

To the extent any market-timing can be reasonably done with this ticker, however, this stock's weakness since May's peak is an attractive buying opportunity. The market's just pricing in too much transitional doubt that isn't merited here. Don't overthink it.

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Bank of America is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Kraft Heinz and T-Mobile US. The Motley Fool has a disclosure policy.