This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
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Berkshire Hathaway's stock price has been crumbling of late, even as the S&P 500 index has been soaring to new highs.
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Longtime CEO Warren Buffett is stepping down in a matter of months.
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Investors buying Berkshire Hathaway stock today are stepping in ahead of what is likely to be the most watched CEO transition in modern history.
Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is an iconic company that is, for now, run by one of the most famous investors in Wall Street history: Warren Buffett. But shortly after Buffett announced he would retire from his CEO role at the end of 2025, Berkshire Hathaway shares started to deflate. They are now down around 15%, and its class B shares are trading below $470. Is this a good opportunity to buy the stock?
What is Berkshire Hathaway, anyway?
Berkshire Hathaway is classified as a finance sector company largely because it has significant insurance operations. And that isn't a bad label to put on it -- every company has to be categorized somewhere -- but it doesn't do justice to the actual businesses owned by the diversified conglomerate. Berkshire Hathaway's corporate umbrella covers more than 180 wholly owned companies. It also holds a massive portfolio of publicly traded stocks.
The variety of businesses in the Berkshire Hathaway empire includes everything from insurance companies to manufacturers, from utilities to retailers, and from railroads to candy makers. And that's far from a complete list -- I could keep going, but you probably get the idea. What investors in Berkshire Hathaway are really buying is more akin to a mutual fund than a traditional company. And that means that when you buy Berkshire Hathaway, what you are really doing is investing alongside Buffett.
This is why the leadership transition from Buffett to his hand-picked successor, Greg Abel, is such a big deal. And it is why investors are selling the stock even as the market rises. The conglomerate's incredible long-term performance, which was based on Buffett's unique investment approach, likely contributed to the stock's premium valuation.
Is it time to jump ship or jump aboard?
For investors who only own shares of Berkshire Hathaway because of Buffett, it makes some sense to sell in the wake of his retirement announcement. There is no way to know what Abel will do at the helm of Berkshire Hathaway, and he has big shoes to fill. However, there are some things you ought to consider before making a buy or sell decision about the stock.
For starters, Buffett is retiring as CEO, but he is not completely leaving the company just yet. He will stay on as the chairman of the board of directors. That means that he will remain Greg Abel's boss. Although Buffett famously has a hands-off management style, when a Berkshire subsidiary needs an assist, he steps in. So we can expect that Abel won't be left adrift. He will still have access to the sage wisdom of the Oracle of Omaha to help him out as needed.
Then there's the important fact that Abel has worked for Buffett for decades. He is steeped in his mentor's investment approach and has played an important role in the conglomerate's investment process for several years, too. So when he's in the CEO seat, his investment approach will be based on Buffett's approach. Sure, Abel is a different person, so his style won't be identical to Buffett's. But they are highly likely to rhyme.
All in all, the CEO transition will be a huge deal for Berkshire Hathaway. But it may not be as dramatic a change as some fear when it comes to how the giant conglomerate operates. That said, Buffett is leaving Abel with a huge cash stockpile -- Berkshire had over $340 billion of cash on its balance sheet at the end of the second quarter. That will be a drag on near-term performance, but could also allow Abel the chance to hit the ground running since it could fund some sizable acquisitions.
The future is unknowable, but Berkshire isn't likely to change much
The recent slide in Berkshire Hathaway's share price is likely related to Buffett's impending retirement. That event is a big deal, but given Abel's long history with Buffett, it may not be as big a deal as some investors fear. If you only have Berkshire in your portfolio because of Buffett, selling could make sense. But if you simply want to be a long-term investor in a Buffett-like investment approach, then there's literally no better option than Berkshire Hathaway. And the stock's decline below $470 could make this a smart moment for you to get on board.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
