Are you afraid the stock market has finally run into an economic headwind, and is going to struggle for the foreseeable future? And, do you have an extra $214,500 lying around?
It's not bad advice. In fact, UBS has some empirical evidence that Berkshire stock holds up better than the average stock does during a bear market, should this soft patch for stocks and the economy lead to that outcome.
On the other hand, it's not as if UBS has uncovered some hidden secret about the virtues of value-oriented investing.
The recommendation officially came on Monday, when UBS initiated coverage on Berkshire Hathaway at a "Buy" rating, establishing a target price of $244,500 for the famously expensive A shares of Berkshire stock . The research and target price didn't make such a distinction for the lower-priced B shares of Berkshire stock (which last traded near $140 apiece), though inasmuch as they're mini mirror images of the A shares, it's possible for investors with smaller portfolios to heed the advice.
And to be clear, UBS isn't betting on the Oracle of Omaha, who is becoming less and less important to the value of BRK as he moves through his golden years. It's a bet on "the Buffett way," which has become the M.O. for all the managers that make Berkshire stock what it is.
The crux of the bullish thesis from UBS analyst Brian Meredith:
"We believe that the current uncertain economic and market environment plays into the hands of Berkshire Hathaway, with its structural advantages of permanent capital, strong cash generation and industry-leading portfolio of businesses … This enables BRK to make acquisitions and/or invest in its operating units despite challenging environments, positioning it to grow earnings and book value faster than the S&P 500 ."
He's right, though it's something long-time Buffett students have understood for a while.
Berkshire Hathaway Is a Buy, But …
Kudos to UBS for posting the investment idea in a way that encourages action, but it's not as if the research arm of the brokerage house broke new ground. Berkshire stock is - more than anything else - a value stock, and value stocks generally do outperform growth stocks when economic headwinds begin to blow … particularly when growth stocks are pushing their valuation limits as they are now.
The chart below compares the performance of Berkshire stock (A shares), the S&P 500 Value Index, and the S&P 500 Growth Index.
Click to Enlarge
Yes, growth has outperformed for the past 20 years, but bear in mind the value index doesn't factor in dividends. With dividends, value investing becomes much more competitive with growth stocks, and in some timeframes outperforms growth on a total return basis.
That's not the point of the chart, though. The purpose of the chart is to illustrate that income-oriented BRK (1) still can and does lose ground when the bear growls, and (2) doesn't necessarily outperform a generalized grouping of value stocks.
There's also the issue of timing.
That is, to fully capitalize on the nuances of Berkshire Hathaway UBS is aiming to tap into, one has to figure out when the market's psychological tide is turning … something that's notoriously difficult to do. It matters to market-timers who may be interested in taking UBS' advice, as BRK tends to underperform in high-growth phases.
Bottom Line for Berkshire Stock
UBS is awarded 8 out of 10 possible points for picking a name that fares better than the average equity when things get tough, as they might be becoming now. On the flipside, UBS is awarded only 2 out of 10 possible points for creativity - Berkshire Hathaway is a no-brainer play that's built from the ground up to provide a reliable cash flow. Of course it's going to thrive when other names can't.
Nevertheless, an obvious trade isn't necessarily a bad trade. Even if the bulk of the reason BRK thrives in tough times stems from investors' perception that it's a superior all-weather pick, the reputation is well-deserved, and helps provide a boost when few other stocks can find one.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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