With just over a month in the year, Berkshire Hathaway (BRK.A 0.99%) (BRK.B 1.08%)the big conglomerate led by legendary investor Warren Buffett, is looking to put the finishing touches on what could be a big win over the S&P500a broader benchmark for the market.
Berkshire’s stock is up more than 3% this year, at the time of this writing, while the S&P 500 is down more than 17%. Winning this year would put Berkshire back on a two-year winning streak on the S&P 500, and Berkshire has consistently outperformed the market since 1965.
Will the Oracle of Omaha and Berkshire be able to continue this streak in 2023? We’ll take a look.
Why Berkshire Wins
Berkshire made a small gain in the market in 2021, a year in which the technology absolutely exploded. Berkshire has done well thanks to the many stocks it holds in its large equity portfolio, including Appleand strong performance in the other businesses it operates.
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But when inflation got high in 2022 and the Federal Reserve had to quickly and intensely raise interest rates, investors hastily dumped the technology. The Nasdaq Compound is down nearly 30% this year. Investors have flocked to the security, and Berkshire is certainly a name with a strong balance sheet and an incredibly experienced management team with a proven track record.
Berkshire also operates several large businesses in sectors that have performed well this year, such as energy and insurance. The company can also hedge rising interest rates to some extent, as it holds about $95 billion of US Treasuries and other fixed income maturities, which have seen their yields rise and led to higher the company’s investment income.
What will 2023 look like?
Of course, there is still a lot of uncertainty about what will happen in 2023. Will there be a recession? Will there be a Deep recession? Is the Fed almost done with its rate hikes? Will inflation turn out to be more rigid than expected, forcing the Fed to remain hawkish?
It’s a lot to try to figure out. The S&P 500 is full of many big tech stocks that have been really hammered this year, so if the Fed does indeed slow down and eventually stop raising rates, then tech stocks could rebound quickly.
It will also depend on whether there will be a recession next year and how deep that recession will be. Slower rate hikes and an eventual halt, coupled with no recession or a modest recession, could give the S&P 500 the edge. Berkshire also benefits from a rise in the tech sector, but perhaps not as much as the market at large.
Then, of course, if there’s a bigger recession and the rate increases end up being bigger than what the market is currently expecting, I’d probably give Berkshire the edge as a safe haven. The company has more than $105 billion in cash and cash equivalents and is ready to weather the storm.
Here is what I choose
Ultimately, I like Berkshire in 2023, and not necessarily because I think it’s definitely going to beat the market. On the contrary, I think Berkshire is better prepared to deal with a range of scenarios given the uncertainty in the air.
Even if conditions end up favoring the technology, Berkshire could still do well. Also, while the company currently trades at around 1.5 times its book value, towards the higher end of the range where it has historically traded, that doesn’t strike me as a particularly demanding valuation considering its performance and continued strong cash position.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
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