Can Berkshire Hathaway Beat the Market in 2023?

With a little more than a month left in the year, Berkshire Hathaway (BRK.A 0.99%) (BRK.B 1.08%)A large conglomerate run by the legendary investor Warren Buffett, looks to put the final touches on what could be a big victory through S&P 500a broader benchmark for the market.

Berkshire shares are up more than 3% this year, as of this writing, while the S&P 500 is down more than 17%. This year’s win would get Berkshire back on track for a two-year winning streak in the S&P 500, and Berkshire has regularly outperformed the market since 1965.

Can the Oracle of Omaha and Berkshire continue this streak in 2023? Let’s see.

Why Berkshire won

Berkshire makes a small profit from the market in 2021, the year in which technology really explodes. Berkshire does well because of the large number of stocks it owns in its large equity portfolio, included applesand strong performance in other businesses it runs.

Warren Buffett.

Image source: Motley Fool.

But when inflation reaches its peak in 2022 and the Federal Reserve needs to raise interest rates as soon as possible, investors are rushing out. The Nasdaq Composite down close to 30% this year. Investors flocked to the security, and Berkshire is definitely a name with a strong balance sheet and an incredibly experienced management team that is battle-tested.

Berkshire also operates several large businesses in sectors that have performed well this year, such as energy and insurance. The company can also hedge rising interest rates to a certain extent because it has roughly $95 billion in US Treasury bills and other fixed income maturities, which has seen yields rise and led to increased investment income in the company.

What will 2023 bring down?

Obviously, there is still a lot of uncertainty about what will happen in 2023. Will there be a recession? There will be a deep recession? Is the Fed almost done with its rate hike? PROSPECTIVE inflation prove stickier than anticipated, forcing the Fed to remain hawkish?

It’s a lot of trouble to find out. The S&P 500 is loaded with a lot of big tech stocks that have really gotten hammered this year, so if the Fed does indeed slow down and eventually stop raising rates, then tech stocks could pull back quickly.

It will also depend on whether there will be a recession next year and how important said recession will be. The slow rate of increase and eventual stoppage, coupled with either no recession or a modest one, could give an edge to the S & P 500. Berkshire also benefits from the rise of the tech sector, but perhaps not as much as the broader market.

Then, of course, if there is a more significant recession and rate hikes become greater than the market currently expects, I’d probably give the edge to Berkshire as the safe haven. The company has more than $105 billion in cash and cash equivalents and is ready to weather the storm.

Here is what I took

Ultimately, I like Berkshire in 2023, and not necessarily because I think it will definitely beat the market. Rather, I think Berkshire is better prepared to deal with a range of scenarios given the uncertainty in the air.

Even if conditions favor tech, Berkshire can still do well. Furthermore, while the company currently trades at roughly 1.5 times its book value, towards the high end of where it has traded historically, this does not strike me as a particularly demanding valuation when you consider its performance and continued strong cash position.

Bram Berkowitz do not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple and Berkshire Hathaway (B stock). The Motley Fool recommends the following options: long January 2023 $200 call on Berkshire Hathaway (B stock), long March 2023 $120 call on Apple, short January 2023 $200 put on Berkshire Hathaway (B stock), short January 2023 $265 call on Berkshire Hathaway (share B), and short the March 2023 $130 call on Apple. The Motley Fool has disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *