Berkshire Hathaway's (NYSE:BRKb) latest 13F filing revealed a new stake in Aon (NYSE:AON). As of Mar. 31, Warren Buffett’s company holds 4.1 million shares of the Dublin, Ireland-based professional services firm. The position is relatively small for Berkshire’s standards, meaning it was most likely initiated by one of his two investment managers.
Still, when Berkshire buys a new stake, the stock of the company in question usually jumps. Having the best investor in history as a shareholder means you’re doing things right. On the other hand, not everything Buffett touches turns into gold. Berkshire ‘s $5B loss on its airlines investment proves he can make mistakes, too. Is Aon going to be one of them? The Elliott Wave chart below suggest it might be.
Aon’s monthly chart allows us to take a look at its entire development going back to the early 1980s. The stock was trading below $3 a share back then and is now close to $260. Investors who missed the first 20 years can still be very pleased with the results. Aon is up more than 1600% since 2002, not counting the dividends.
Berkshire ‘s Aon Bet Might Disappoint
On the other hand, no trend lasts forever. Aon is not immune to market downturns as shown by the 1998-2002 correction and last year’s coronavirus selloff. Judging from the chart above, another drop seems to be around the corner.
Aon’s uptrend since its public debut has produced an almost complete impulse pattern, labeled I-II-III-IV-V. The weakness around the turn of the century fits into the position of wave II, while wave IV is represented by the March 2020 crash. It follows that the current sharp recovery must be part of the fifth and final wave.
According to the theory, a three-wave correction in the opposite direction follows every impulse. This means that once wave V is over, we can expect a major bearish reversal. Corrections usually erase most of the fifth wave. Here, this translates into a decline back to the support of wave IV near $150. Assuming Aon stock is going to approach the $300 mark first, we are talking about a ~50% drop. Only time will tell who’s right, but unlike Berkshire, we’re not willing to bet on Aon right now.