Berkshire Hathaway: A Classical Alternative to Ark Funds

Upcoming Earnings

Learn More

Nuovo su Borsa Italiana: -3x NVDA -3x NIO 3x UBER 3x AMD -3x BABA 3x NFLX -3x COIN FAANG+

New on LSE: 4x & -4x Semiconductors

Learn More

New on LSE: 5x & -3x Magnificent 7

Learn More

New on LSE: 3x & -3x AI

Learn More

Taglio della commissione su 3x QQQ & 3x SPY: Dal 0,75% allo 0,01%

Learn More

Earnings: GS, NFLX, TSM

Learn More

Upcoming Corporate Actions: KWE3, FB3S

Learn More

Earnings: PLTR BABA UBER DIS ARM PYPL

Berkshire Hathaway: A Classical Alternative to Ark

MARKET INSIGHTS
02 Giu 2022

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Berkshire Hathaway may seem to be a peculiar organization that cannot easily be pigeonholed into any sector. In its latest annual report dated February 26, 2022, it was stated:

It owns and operates more U.S.-based “infrastructure” assets – classified on our balance sheet as property, plant and equipment – than are owned and operated by any other American corporation.
Operations of its “Big Four” companies account for a very large chunk of Berkshire’s value: the insurance business, the company’s 5.55% stake in Apple Inc the railroad company BNSF whose trains traveled 143 million miles and carried 535 million tons of cargo in 2021, and Berkshire Hathaway Energy which is described as a leading force in wind, solar and transmission throughout much of the U.S.
Leading non-controlling stakes in financial services companies such as a 19.9% stake in American Express, a 13.3% stake in Moody’s, a 12.8% stake in Bank of America and an 8.3% stake in BNY Mellon.
Non-controlling stakes in leading companies outside of financial services and Apple include a 9.2% stake in Coca-Cola and a 7.7% stake in Chinese electric vehicle company BYD.

Outside of “market value” considerations, the company also has a $10 billion investment in Occidental Petroleum Corporation, a 26.6% interest in Kraft Heinz and a 38.6% interest in Pilot Travel Centers (also known as “Pilot Flying J”), the U.S.’ biggest operator of truck stops and travel centers.

Furthermore, despite the company’s “Big Four” assertion, it is clear that – in terms of earnings – the company’s mainstay has been its numerous investments:

Thus, it could be stated that, in its current stage, Berkshire Hathaway is essentially an investment management firm whose principals’ investment strategy can be bought into via the company’s shares – which is theoretically similar to being invested in any of Cathie Wood’s Ark Funds. The difference lies in the former’s concentration largely along classical businesses while the latter focuses predominantly on companies in the zeitgeist of “innovation”.

Share Classes Explained

In response to investor demands more than 20 years ago, the company’s stock is currently available in two share classes, with a few key differences:

The “Class A Common Stock”, which the company states will never face a stock split, is meant for investors focused on long-term profits. At prices currently around the $500,000 mark, it is one of the most expensive shares in the world. However, the stock’s holder can choose to convert each “Class A” share into 1,500 “Class B” shares.
The “Class B Common Stock” is priced more reasonably, trades more frequently and cannot be converted into “Class A” shares. However, each “Class B” share currently has 1/10,000th the voting rights of a “Class A” share.

Theoretically, given these differences, it stands to reason that an analysis of the 3 ratios similar to that executed in recent articles should show an exact match across both share classes. In reality, however, this isn’t quite the case.

The “A vs B” Factor – calculated simply by dividing the Class A Ratio by the Class B Ratio – indicates that there are instances when the Class B shares tend to be traded either at a (slight) premium or a discount relative to the Class A shares. There is an additional interesting point to note in the snapshot:

The seemingly-perfect Factor for the PE Ratio as of the end of March doesn’t quite imply a perfect price match across share classes. Since the Factors for the PS and PB Ratios are both below 1,500, this seems to be a minor rounding error from the data provider.

Given the PS and PB Ratios as of that day, it could be estimated that the Class B share traded at a slight premium relative to the Class A share. This is proven by actual stock prices recorded: as of closing on that day, a 1/1,500th “slice” of the Class A was 0.08% cheaper than the Class B.

On the 31st of May, the PE Ratio continues to show a perfect match across share classes while the Factors for PS and PB Ratios are 1,501.90 and 1,492.99. As of closing that day, a 1/1,500th “slice” of the Class A was 0.02% costlier than the Class B.

“Class A” Investor Behaviour Trends

In 2017, the company’s Board of Directors has approved a common stock repurchase program for both Class A and Class B shares. While there were no purchases in 2017, this program has been running in subsequent years. While the number of Class A shares has reportedly decreased over the years, the number of Class B shares have increased. It is likely that a number of Class A holders have been exercising their right to convert to Class B shares. Assuming no other factors, the number of conversions that have taken place can be estimated thus:

There seems to be no overall trend between overall repurchases vis-à-vis conversions, which lends support to two arguments:

Some Class A holders have likely rationalized that holding Class B shares – and the inherent premium/discount trends – is marginally more preferable to holding the Class A shares.
It is likely that conversions were made in response to market conditions making it preferable to hold the Class B Shares, which is significantly more liquid.

Monthly Traded Volume: Trend Analysis

To evaluate the relative attractiveness of the company’s value proposition across the investor classes, lets define two terms purely for this portion of the analysis:

An “Exit” is defined as the instance when a month’s average traded volume (in units) is lower than that in the previous month.
A “Buy-In” is defined as the instance when a month’s average traded volume (in units) is higher than that in the previous month.

From 2019 till the present, it can be determined that trends in both share classes are in tandem more often than not:

While there are instances where the outlook among the two shareholder demographics have differed, this doesn’t lend itself to any particularly significant or even mid- to long-term differences in trajectory. Thus, the differences in ratios highlighted between the share classes have been relatively miniscule.

In relation to the benchmark S&P 500 index (denoted as “SPX”), there have been some very interesting developments in terms of stock performance in 2022:

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Leverage Shares ETPs

Introducing Our Single-Stock ETPs

Short and Leveraged ETPs Explained

Rebalancing and Compounding

Six Things To Know About Our ETPs

A Built-in Airbag to Limit Losses

Redatto da

Sandeep Rao

02 Giu 2022