Six reasons Berkshire stock has lagged the market—and three reasons it could outperform again
Berkshire Hathaway's Class A shares ended Friday at $727,455, up 1% on the session. But the shares are down 10% from a record high on May 2 and now are slightly behind the S&P 500 so far in 2025. Berkshire is up just under 7% so far this year, against 7.5% for the index.
On May 2, Berkshire was more than 20 percentage points ahead of the S&P 500. The Class B shares, which ended Friday at $485, have tracked the A shares.
Berkshire now is behind the S&P 500 index over the past 10 years with a 13.4% annualized returns against 13.7% for the index, Bloomberg data sbow.
Here are six possible reasons for underperformance:
An erosion in the 'Buffett premium." The Berkshire CEO, 94, said at the meeting that he will step down at the end of the year.
Slipping profits. Berkshire's operating profits are expected to be down about 6% this year, depressed by lower investment income, after rising nearly 30% in 2024.
Insurance fears. Berkshire is the leading property and casualty insurer in the world with over $300 billion of capital, and investors are concerned that pricing is eroding in some P&C business lines.
Too much cash. Berkshire's income from its big cash hoard of over $300 billion could fall by about $3 billion annually if the Federal Reserve, as markets now expect, cuts short rates by a percentage point over the next 12 months.
Little investment activity. Buffett failed to take advantage of weak markets earlier this year to load up on stocks and he shows no signs of relenting.
No stock buybacks. Berkshire hasn't bought back stock from May 2024 through late April, a sign Buffett has viewed the stock as fully priced.
Here's why the stock could best the market for the rest of 2025.
Valuation has fallen. At its May 2 peak, Berkshire traded for close to 1.8 times book, its highest level in more than a decade. The stock now trades for a more reasonable 1.55 times book value. This is based on a Barron's estimate that adjusts our projection of June 30 book value for changes in the value of Berkshire's equity portfolio in the first three days of July. A valuation of 1.55 times book is close to the five-year average. Looking out to year-end 2025, Berkshire trades for about 1.5 times our estimate of book value.
Berkshire's price/earnings ratio is above the S&P 500 at around 24 based on projected 2025 earnings—against 22 for the index—but the P/E is lower if the earnings are adjusted for profits of the companies in the equity portfolio. Berkshire watchers call this 'look-through" earnings.
Apple stock is doing better. After a tough second quarter in which it fell 7%, Apple stock is up about 5% in July to nearly $214. Apple is the largest holding in Berkshire's $300 billion equity portfolio. The Apple stake is now worth over $60 billion assuming no change in the holding since March 31 of 300 million shares. Other big Berkshire equity investments have been strong, notably Bank of America and American Express.
Share repurchases. It likely would help the shares if Berkshire starts buying back the stock again. Investors should find out about any activity in the second quarter when the company reports financial results—likely on Aug. 2.
Berkshire has had many periods of underperformance during Buffett's 60 years at the helm, but its long-term record is extraordinary. There's no reason to think its best days are over.
Write to Andrew Bary at andrew.bary@barrons.com
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