Buffett’s Berkshire Hathaway Trading at Deep Discount

Value deal of the century, or simply more Buffett hype?

SmartMoney’s Dave Kansas writes about a proven stock trading at bargain basement prices that Warren Buffett would immediately snap up. It’s a little conglomerate known as Berkshire Hathaway, and the Sokol Affair, in part, has made it the value stock du jour. Kansas notes the stock touched a 52-week low on June 15, trades just above book value and has a long track record of delivering solid returns.

Berkshire hit $109,925, its lowest level since June 2010. It has since recovered a bit to trade above $112,000, but the shares are still down about 14% since a Feb. 28 high of $131,300. Berkshire's shares haven't traded below $100,000 since January 2010. Berkshire's B shares, which trade at about $75, have performed in similar fashion.

There are a handful of fundamental reasons that Berkshire shares have come down in value since February, Kansas writes. The company's large reinsurance business, which provides insurance for insurance companies, is facing headwinds after a round of natural disasters, especially in Australia, New Zealand and Japan.

In addition, Berkshire's stock holdings have a substantial concentration among financial stocks, including Wells Fargo, American Express, Bank of New York Mellon, MasterCard and U.S. Bancorp. That sector is the worst-performing among the S&P 500's 10 groups this year, down 7.35% year-to-date.

David Sokol (Photo: AP)More difficult to measure is the impact of the so-called Sokol Affair. Earlier this year, Buffett lieutenant David Sokol, (left), resigned his position after it emerged that he had acquired a stake in Lubrizol, a company that he later successfully persuaded Buffett and Berkshire to acquire. Sokol said his resignation was not related to the share purchase and that he doesn't believe he did anything wrong.

As Kansas notes, the messy nature of the events put a little tarnish on Buffett's sterling reputation. At his annual shareholder investment-palooza in May, Buffett acknowledged that mistakes were made, but also stated that he didn't think the Sokol Affair would "change a record of 80 years."

Since the meeting, the Sokol Affair has receded, along with Berkshire's stock. Whitney Tilson, a value fund manager, says Berkshire has gotten about as cheap as it ever has. He calculates Berkshire Hathaway's intrinsic value at $167,000 a share. Given the current deep discount, The Tilson Focus Fund and hedge funds Tilson manages have gobbled up shares, adding to positions this week and making it one of the firm's biggest overall holdings.

Berkshire shares were cheaper in November 2008 and March 2009, Tilson says, but during those two periods the very survival of a lot of financial institutions, including Berkshire, were up for debate. Today, that so-called tail risk is deeply diminished, one reason, according to Kansas, Tilson is “scarfing up” Berkshire.

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