BRK a Buy or Sell Now? Intrinsic Value, Cash & Margin of Safety!

Good day, fellow investors. Berkshire's earnings are out. Greg Abel has spent some money and Michael Burry said that he doesn't have the patience for the fat pitch that Warren Buffett was waiting for. And I believe this fear has come true. I do not find Berkshire an attractive investment going forward. The comments were crazy. Patience for judging Abel. Lululemon is better. You should know Greg better, etc. However, we have to discuss what kind of investment is Berkshire now. Is it a buy? Is it a sell? Hold? How it might fit your portfolio, which is the most important thing. We'll do the intrinsic value, discuss earnings, margin of safety, cash, Greg Abel, and then conclude. Now, we discussed already the big video discussing in detail the sum of parts value, intrinsic value, 5 months ago after the February earnings. But there is something more important that I want to show here. Now, Berkshire B is 521, 22 bucks. 15 May 2020, and then March was 169, something like that. Somebody made a video on the 20th of March, Berkshire stock valuation, 10% returns expected, stock to buy, bargain price now. That's a bargain price when Berkshire offers 10%. 6 years is not that far. We have to adjust for that and see what would be a bargain price for Berkshire, a good price, and what perhaps even a sell. I'll look a little bit at earnings. Everything looks good. Great earnings. But you we have to adjust for the investment gains. So, we are their operating earnings, 24 billion. Good for half of a year. If we then adjust a little bit more for insurance, the volatility there, you have to always keep in mind once in a decade, there will be a 10-20 billion dollar hit. Insurance investment income that comes mostly from the cash. There is some other currency volatility fluctuations, but we'll adjust that. Let's now calculate the intrinsic value and then discuss more the details. For that, we have our intrinsic value template. You can download it in the link in the description below in my free value investing course. Here we have Berkshire. We just click here. And as an input I have used net income 45 billions. Here is the market cap 1.124 trillion as I'm filming this. And then if I go by net income, if I assume a growth rate of 6%, if I expect a 10% return from investment, and I put a P ratio on that profits of 17, then I get to 1.2 billion, 1.3 billion terminal value in 10 years. Compare that to the current market cap, you don't get much of a return from investing in Berkshire now. There are some cash additions that we can discuss, but let's do scenario number two. 8% growth rate, terminal multiple staying where it is at 25, present value closer but still below the current market cap. Worst case scenario, margin of safety, a P ratio of 12. You will say, "Sven, that's crazy." Stick with me for a while. Present value 300 billion. Of course, you have to add the cash there, but the average P ratio or the range of Berkshire's P ratio in history, the last 40 years, has been between 10, 17, 18. Only now it is on the adjusted earnings 25. These ups and downs that you see here are due to the change in accounting regulations in 2018. But 2010s and earlier 10 to 15 was Berkshire's P/E ratio. So, I'm not crazy when I'm putting the valuations there. And then, as Berkshire grows, we have to understand, okay, what is the real value delivered? Of course, you have to be very careful. This from Seeking Alpha. Everyone always has Berkshire as a buy because if you say it's not a buy, you get a lot of hate. But, if I do the math a little bit, 450 billion to 1.1 trillion, if you multiply 45 billion from 10 to 25 times earnings, then there is the cash. And some would say, "Okay, you have to add that cash up." Not that fast. First, Greg Abel started spending a little bit, spent more than came in, which is something new. And now that he is spending money, maybe the policy will be different than Warren Buffett because he is spending now in the most expensive market in history. If you just look at the S&P 500, the dividend yield 1% lower than during the peak of the dot-com bubble and far from the averages. This is crazy. But, there is rationale behind it. Google now might be better than treasuries. We have discussed Google. Perhaps Greg Abel bought at lower prices. Again, going back to our template, around a 5 6% return from Google. But, that is expecting double-digit growth rates for the next 10 years. If that is hit, it might be better than the 3.8 Treasury. However, if we look at the cash position, average cash position 3.8 Treasury, we get to where the insurance investment income comes from around 14 billion likely some taxes on it. So, 12 billion per year that have to be deducted from the current operating earnings. If you add the cash to the intrinsic value. Then, if I adjust earnings just a little bit, minus two for the volatility of insurance, minus six for the investment income, perhaps I had to put minus five. No, let's put minus six. Keep it there. Minus two for other, that's minus 14. 14 for the first half of the year times two is 28 billion. 28 billion times 10 to 20 is 280 to 460 billion. You add the cash, let's say 400 billion or something like 350, you get to evaluation of 800 billion. That means that the downside for Berkshire is 30%. That's much better than the S&P 500. I think the downside of the S&P 500 is 50% to 70% in a bad case scenario. So, Berkshire with the cash, with the valuation, even in a bad case scenario, should hold better. Apple is deploying some money, but not at historical returns. Buffett and Munger used to target at least 8 to 10% returns on investment. Apple, given the action now, is lowering that to six 67 perhaps, but let me just show you. One of Buffett's last moves was to acquire Oxy Chem for 9.7 billion. If you look at the presentation of Occidental, you see that it was a growing business, and Buffett bought here at 1 billion pre-tax income or 800. So, he bought at 8% plus the growth, that's 10% returns plus. It's logical that Greg is spending the money. Everyone is screaming, "Why are you holding cash? Give us a dividend. Do something. Everyone is getting rich." He simply doesn't have it. He's not Buffett. He's a great operator. I think he's will be a great CEO, but he's not Buffett. And here I agree with Michael Burry. When it comes to investing in Berkshire, we can say that Berkshire on average recessions, insurance, catastrophes, this is now doing 40 billion per year, perhaps 45. If you want to invest with an 8% return, you want to start buying Berkshire when it gives you an 8%, when it gives 12% sell wives, children, mothers, everything and buy more. But, if I look at the numbers now, I took 45 billion here. So, from the current market capitalization of 1.2 trillion, if I want to make 8% per year for the next decades, we need to be at 2.4 trillion in 10 years. At the P/E ratio of 15, Berkshire needs to give me 160 billion in profits. Over 10 years, that means that from the current 45 here, I need 13.5% growth in earnings. That will not happen. At best, due to the size, will be 6-7%. That's it. And then, we are here intrinsic value 498 billion with the money deployed. You can say, "Sven, you're crazy. That's 50% down." Remember this. This is what it looks when the market is ugly. Where Where was the price? It was 70% from where it is now. Okay? That means 363 billion if we multiply to the current situation. Then you would say, "Okay, cash." Let's say they earned from 6 years ago, they earned 210 billion. Total is 570 billion when we add that, let's say 600 billion. So, there is the risk of 50% down, maybe not, but 30% yes. And the upside is very limited because simply to gain traction this that Berkshire keeps a P/E ratio of 25 forever is too risky. I said it's better than emerging markets, it's better than the market, it's better than value ETFs for sure. But, there is a significant premium on Berkshire now for what Berkshire office offers. Great business, great everything, margin of safety, balanced fortress, whatever you want. Buffett is gone and the price is high. So, Berkshire should crash less, but that's not value investing. Crashing less is not value investing. When I compare to Berkshire and compare the 10-year Treasury at 4.7, it starts to get tempting as a comparison. So, I have to say it, Berkshire is not a buy. Now, is it a hold? Depends on you. If I would have Berkshire in my portfolio now, I would sell. So, I'm in the Barry camp here. Where are you? Let me know in the comments.