Is Berkshire Hathaway Inc. (BRK.B) Trading at a Major Discount?

Indeed, most individual investors want to invest like famous investor Warren Buffett, which is the reason why they tend to piggyback his investment ideas. However, the billionaire investor recently told CNBC’s “Squawk Box” that investors should not mimic his moves or those of other successful money managers. “I wouldn’t ever urge them [investors] to do anything based on what we do. If they want to do what Berkshire does, then they should buy Berkshire”, said the Chairman and CEO of holding company Berkshire Hathaway Inc. (NYSE:BRK-B). Moreover, the Oracle of Omaha said: “I think they’re making a big mistake by piggybacking me or 10 other people whose names appear in the paper. That is not a great strategy; a great strategy is just to buy stocks consistently over a lifetime and not worry too much about whether they go up or down in any given month or year.” Of course, this is great advice from Mr. Buffett, one of the world’s wealthiest people, but not all retail investors can afford the luxury of losing thousands of dollars before making a profit. Leaving Mr. Buffett’s recommendation aside, let’s find out how hedge fund sentiment towards Berkshire Hathaway Inc. (NYSE:BRK-B) changed in the fourth quarter of 2015.

Is Berkshire Hathaway Inc. (NYSE:BRK-B) the right investment to pursue these days? The best stock pickers are turning bullish. The number of long hedge fund positions increased by six in recent months. At the end of this article we will also compare BRK-B to other stocks including Exxon Mobil Corporation (NYSE:XOM), Amazon.com, Inc. (NASDAQ:AMZN), and General Electric Company (NYSE:GE) to get a better sense of its popularity.

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Berkshire Hathaway Inc. (NYSE:BRK-B) is a holding company that owns subsidiaries engaged in a wide range of business activities. Both the company’s class A and class B common stock was caught up in the middle of the broader market sell-off back in August and September, which created very attractive entry points for investors. Whitney Tilson, founder and managing partner of Kase Capital Management (formerly T2 Partners LLC), discussed his firm’s investment in Berkshire Hathaway in a letter to investors that covered the third quarter of 2015. The money manager stated that the shares of the holding company were trading at a 30% discount to intrinsic value at the end of September 2015. The investor said the following in the letter:

“Using the valuation methodology I’ve used for two decades (see pages 13-18 of my presentation), which has proven to be quite accurate, I estimated at the beginning of this year that Berkshire’s intrinsic value was $254,593. With the year now ¾ over, I estimate that this has risen by ~6% to ~$270,000, based on the company’s 2.4% increase in book value and 14% increase in operating income of the non-insurance businesses in the first half of the year. Thus, with the stock closing September at $195,260, it’s trading at nearly a 30% discount to intrinsic value.”

More importantly, the letter said that Berkshire Hathaway Inc. (NYSE:BRK-B)’s stock “offers the wonderful combination of substantial upside and limited downside. But it’s even more compelling than it appears because Berkshire has made a nearly $14 billion profit, equal to $8,428/share, on its investments in Heinz and Kraft, which is not yet reflected in the company’s financial statements. To my knowledge, this extra value hasn’t been noticed by any analysts, media or investors.”

With all of this in mind, on the next page we’ll take a gander at the recent action surrounding Berkshire Hathaway Inc. (NYSE:BRK-B), as well as take a look at what other investors had to say about the holding company. 

Investment firm Trapeze Asset Management, founded by Herbert and Randall Abramson, also discussed Berkshire Hathaway Inc. (NYSE:BRK-B) in its third-quarter investor letter, saying:

“Berkshire Hathaway continues to add to its captive owned company segment. The recent $32 billion Precision Castparts acquisition should prove accretive to 2016 earnings. Importantly, this illustrates the continued shift to direct ownership of high quality businesses. The stock picking expertise of Buffett and Munger is no longer the thesis as the 100% owned insurance, rail and other first class assets now make up the majority of our valuation estimate, which is above $250,000 per Class A share and rising.”

This means that both the class A and class B shares of Berkshire Hathaway are currently trading at a huge discount to intrinsic value despite having gained 7% over the past month. Berkshire Hathaway Inc. (NYSE:BRK-B)’s class B common stock is down by 6% over the past 52 weeks.

What does the smart money think about Berkshire Hathaway Inc. (NYSE:BRK.B)?

At Q4’s end, a total of 75 of the hedge funds tracked by Insider Monkey held long positions in this stock, a 9% rise from the end of the third quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or had already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Michael Larson’s Bill & Melinda Gates Foundation Trust has the number one position in Berkshire Hathaway Inc. (NYSE:BRK.B), worth close to $9.82 billion, comprising 58.9% of its total 13F portfolio, with those shares being donated to the Trust by Buffett himself over the years. On the Bill & Melinda Gates Foundation Trust’s heels is Eagle Capital Management, managed by Boykin Curry, which holds a $1.64 billion position; 6.7% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions contain Tom Russo’s Gardner Russo & Gardner, D E Shaw, and Ken Fisher’s Fisher Asset Management.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Giverny Capital, managed by Francois Rochon, established the most outsized position in Berkshire Hathaway Inc. (NYSE:BRK.B). Giverny Capital had $79.9 million invested in the company at the end of the quarter. Norbest Lou’s Punch Card Capital also initiated a $73.8 million position during the quarter. The other funds with brand new BRK-B positions are Ric Dillon’s Diamond Hill Capital, John D. Gillespie’s Prospector Partners, and Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Berkshire Hathaway Inc. (NYSE:BRK.B). These stocks are Exxon Mobil Corporation (NYSE:XOM), Amazon.com, Inc. (NASDAQ:AMZN), General Electric Company (NYSE:GE), and Facebook Inc (NASDAQ:FB). All of these stocks’ market caps match BRK-B’s market cap.

As you can see these stocks had an average of 102 hedge funds with bullish positions and the average amount invested in these stocks was $9.23 billion. That figure was $19.34 billion in BRK-B’s case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand General Electric Company (NYSE:GE) is the least popular one with only 54 bullish hedge fund positions. Berkshire Hathaway Inc. (NYSE:BRK.B) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard FB or AMZN might be better candidates to consider a long position in.

Disclosure: None