In Choppy Markets, It Pays to Own the Business Not Just the Stock

Living in the Dallas, Fort Worth Metroplex (DFW) comes in handy if you’re a Warren Buffett fan, which I begrudgingly have become over the years.

I must admit that my late arrival to the club is mostly because I used to be primarily a chart based investor. But as I’ve aged, I’ve learned that by combining price charts and deep dives into companies you usually achieve much better investment results.

So, back to Warren and DFW, which are connected because in the far north regions of the metroplex there is a huge complex known as Grandscape which is anchored by the Buffett owned Nebraska Furniture Mart (NFM).

Now, a few months ago my washer broke and I started searching for a new one. The usual suspects, Home Depot (NYSE: HD), Lowe’s (NYSE: LOW) and related big box retailers that carry appliances were all out of the washer I needed. In fact they were out of a lot of things.

Their excuse was that we were in the midst of the supply chain squeeze. They informed me that it would be weeks to months before they could get me a new washer, as long as I paid for it up front.

Growing a little desperate, my wife and I made the trek to NFM, and guess what? Not only did they have the washer we needed; they sold it to us at a discount because they were making room for the next year’s model.

In other words, while other big box retailers were “out of stock,” the Buffett owned NFM had what I needed at a great price. Moreover, they were already making room for the next generation of the same product, which means they were ahead of the curve.

How’s that for supply chain management?

In my opinion, that’s how you run a business; via the flawless execution of your business plan. And that means successful management of your supply chain and delivering on your customer’s needs.

Berkshire Shares Have the Blues but It’s Probably an Opportunity

Now, before I dig into Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A, BRK.B), I must disclose that I don’t own the stock, at least not at the moment. But it’s certainly on my Buy List.

And that’s because over the years, I’ve come to appreciate what Berkshire represents, which is a dynamic picture of Buffett’s guiding principle for investing: own the business, not the stock.

What that phrase implies is that all investors should dig deeply into a company’s operations before buying the stock and ask a simple question: Before I buy this stock, would I want to own the business?

So, let’s apply the concept to Berkshire itself and see how it holds up.

Understanding the Business

This one’s pretty easy. Berkshire is a holding tank for just about any type of business that Buffett and his pal Charlie Munger and their management team size up as worth owning. A big chunk of the company, however, is insurance companies that include a myriad of companies we’ve never heard of as well as the familiar commercial mainstay GEICO. Insurance means cash flow and cash flow is the lifeblood of a business.

But Berkshire spreads the wealth. For example, here in the DFW area Berkshire owns at least two major realtors, Ebby Halliday and Dave Perry Miller, whose signs are just about everywhere around the region. Again, there’s that cash flow thing.

Nationally, they own niche hamburger chain Dairy Queen, a chain of car dealers, apparel maker Fruit of the Loom, Business Wire, Duracell, and many others while holding large positions in Occidental Petroleum (NYSE: OXY), and my favorite of their holdings Acme Brick Company (Beep Beep).

Would you like to own any of these businesses? For me the answer is yes on most of them. In fact, I own shares of OXY in my private investment account. Dairy Queen makes a pretty good burger. I’ve bought and sold houses with Ebby Halliday. And I know for a fact that my house and my entire subdivision was built with Acme Bricks.

Measure Sales and Earnings Growth

Now we get to the growth metrics, which at this point are not very robust, but are certainly steady and sustainable. In fact, Berkshire’s earnings have been growing at about 5% over the last few years, while the stock trades at a price-to-earnings ratio of 25, which is a bit on the expensive side.

On the other hand, sales have been growing a bit faster at a 10% clip. There is no reason to expect too much of a slowing unless there is a huge economic collapse.

As a result, on this category, considering that Berkshire is not a go-go tech company, I would give it an “I can live with it,” rating. This assessment is based on the fact that the businesses owned by the company are all on solid footing.

Sizing Up Management

Again, this one’s a pushover. Buffett and Munger are two old curmudgeons that know how to make money and have a proven track record. Moreover, they have recruited a team of savvy caretakers who will most likely not mess up the proven formula for success.

And here is the other aspect of management that is underappreciated. When Berkshire buys a company, it usually leaves a successful management team in place. That means that the odds of the company’s continued success remains in place.

So again, this one goes into the Yes box.

Kicking the tires

Familiar readers know that I like to go out and see how my investments fare in real life. Thus, my story about finding a washer at Buffett’s furniture store is a classic example of this useful exercise.

If a business can’t deliver to its customer base, then maybe the stock isn’t worth owning, at least not until management can improve its ways.

So, guess what? After I found the washer at NFM, they’ve become one of the first places I look when I’m in the market for home furnishings. And if I’m doing it, others are doing it, too.

Moreover, I can confirm that since every time I go to the store, it’s packed to the rafters with customers. So I know business is good.

The Price Chart and the Final Decision

Is the price chart being fair to Berkshire? Let’s have a look.

  • The stock is on a downtrend, but so has the market been for six months.
  • The Accumulation Distribution Indicator (ADI) has bottomed out, which means the short sellers are bailing.
  • On Balance Volume (OBV) is also bottoming out, so buyers are starting to crawl back in.
  • The Volume by Price bars (VBP), the big bars on the left side of the chart, are around the 310 area. They’re large and coincide with the 200-day moving average. That means that this price area is a big decision point for buyers and sellers.

In summary, the stock is finding support in this area and is now becoming interesting from a pure price standpoint.

Bottom Line

BRK is a solid business entity from top to bottom. The price chart shows that the stock may be worth nibbling on once it shows signs that the price has bottomed out and money is coming back.

When the stock market is in a funk, it’s worth doing a deep dive into companies which may be worth buying at some point in the future. And when Warren Buffett is in charge, it would be folly to not take this stock seriously at this point.

Editor’s Note: Our colleague Dr. Joe Duarte just gave you invaluable investment advice. You should also consider his new premium trading service, Weekly Cash Machine.

In fact, Dr. Duarte’s inflation-proof income summit is “on air” now. You don’t want to miss his latest investment insights. He’ll show you, step-by-step, how to repeatedly cash in, week after week. The money-making techniques you’ll learn are powerful and potentially life-changing. Click here to grab your spot.