Should You Buy Berkshire Hathaway While It's Below $550?

While the stock market has been selling off recently, one stock that has bucked the trend is Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A). Its shares are up more than 15% year to date as of this writing, and the stock is trading near an all-time high.

Let's look at why Berkshire has outperformed the market and whether the stock is a buy at current levels.

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Dry powder fueling gains

One of the big reasons for Berkshire's strong performance in the face of market declines is the huge cash position it has built. The company essentially acts as the investment vehicle for its CEO and famed investor, Warren Buffett. Berkshire is a conglomerate that owns businesses in a variety of sectors, but Buffett is particularly fond of insurance companies, since he gets access to capital through their float.

Float is simply the money insurance companies collect from policyholders and hold until a claim is paid out. Most insurance companies take this cash and invest it in fixed-income instruments like bonds to generate income. However, Buffett has eschewed this typical insurance company strategy in favor of investing in high-quality stocks.

It's a unique strategy in the industry that has vaulted Berkshire to being of the largest companies in the world by market cap. However, over the past several quarters, Buffett has been much more interested in selling stocks and compiling cash than in investing. In fact, last year he only purchased about $9 billion worth of stock while selling more than $143 billion. This included significantly reducing positions in his top holdings, such as Apple and Bank of America.

Combined with the cash flow the company generated for the year, this left Berkshire with a whopping $334 billion in cash on its balance sheet at year-end. In the investing industry, this is known as dry powder, which is essentially money on the sidelines that can be used to make investments. Berkshire has plenty of dry powder at the moment and one of the greatest value investors of all time at the helm to buy stocks when he feels the timing is right.

Now a simple market correction may not be enough to get Buffett back to aggressively buying stocks. He started to pull back from stocks in the first half of 2024 and the major market indexes like the S&P 500 are still higher than they were at the end of June 2024. However, if any individual stocks become attractive, Buffett has a lot of cash to deploy.

Image source: Getty Images.

Is Berkshire stock a buy?

Although this current market environment attracts investors to Berkshire's dry powder, that doesn't necessarily make the stock a good buy at current levels. In addition to selling down stock positions over the past year, Buffett also decided to stop buying back Berkshire stock.

Berkshire had consistently repurchased shares of its stock each quarter for the past six years until the company stopped in the third quarter of last year. There is no indication that Buffett has bought back any stock this year, which would make it the longest stretch he has gone without repurchasing Berkshire stock since at least 2018.

In the past, Berkshire used to decide whether to buy back shares based on the company's price-to-book (P/B) value. This is a metric commonly used to value insurance companies and represents its price compared to the value of its underlying assets.

Buffett used to use a 1.1 times P/B multiple as a threshold to determine whether or not to buy back Berkshire stock, and he later upped it to a 1.2 times multiple. He eventually stopped using a P/B limit to determine buybacks and now will just buy back stock when he feels Berkshire stock is trading below its intrinsic value.

Trading at over 1.7 times P/B, Berkshire stock is currently well above levels Buffett once considered a good value. Its price-to-earnings (P/E) ratio has also shot up to highs in recent years.

BRK.B Price to Book Value data by YCharts.

Berkshire is being looked at as safe haven where Buffett has plenty of cash at his disposal to start buying stocks when the time is right. But investors are paying a pretty steep premium to wait for him to make his move, and I don't think this will happen soon.

I'd view Berkshire more as a hold and wouldn't be looking to be a new-money buyer at current levels.

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Bank of America is an advertising partner of Motley Fool Money. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.