Can Berkshire Hathaway (BRK.B) Stock Continue To Surge?

Shares of Berkshire Hathaway Inc. (NYSE:BRKa) BRK.B have been on uptrend over the last few weeks. The shares gained 8.4% since the election results compared with the Zacks-categorized Property, Casualty and Title Insurance industry’s 6.9% rise.

Per media reports, the finance sector is likely to benefit from Trump’s “business friendly approaches.” Expectation of a lower tax rate, softer regulation and bias for higher interest rates among others raise investor optimism.

Warren Buffett’s unique business skills have created tremendous value for shareholders over the last 51 years (since the present management took over), while book value (Class A share) has improved significantly (increasing from $19 to $155,501, at a 51-year CAGR of 19.2%). The substantial growth in book value is expected to be boosted further by the improvement in the economy, further gains from the value of the derivatives positions, and continued positive contribution from earnings growth in insurance operations. If tax rate is lowered, book value will improve.

Berkshire Hathaway’s economically sensitive non-insurance businesses – utilities and energy, and manufacturing, service and retail – are performing well. The Utilities and Energy business has grown with increased revenue contributions from Burlington Northern SantaFe Corp. Revenues from BNSF have contributed considerably to the company’s top line. Also, demand for utilities is expected to be strong in the future and drive earnings growth. Collectively, these have driven revenues higher and facilitated margin expansion over the past many years.

This Zacks Rank #3 (Hold) insurer witnessed upward estimate revisions in the last 30 days. The Zacks Consensus Estimate for 2016 moved up by 2.3%, while the same for 2017 moved north by nearly 4%.

Valuation too looks reasonable. The shares are still underpriced with P/E ratio of 21.7, a 23% discount to the industry average of 28.1. Its P/B ratio of 1.4 is in line with the industry average of 1.35.

Also, Berkshire Hathaway carries a VGM score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Our research shows that stocks with Style Scores of ‘A’ or ‘B,’ when combined with Zacks Rank #1 (Strong Buy) or #2, offer the best upside potential.

The expected long-term earnings growth for the company is pegged at 7%. Price earnings growth ratio, which determines the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth, is 3.14. The industry average is 1.98.

Stocks to Consider

Some better-ranked insurers are Alleghany Corporation (NYSE:Y) , First American Financial Corporation (NYSE:FAF) and Arch Capital Group Ltd. (NASDAQ:ACGL) . Each of these stocks sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here..

Alleghany Corporation deals with property & casualty reinsurance and insurance businesses in the U.S. and internationally. The company delivered positive surprises in three of the last four quarters, with an average beat of 20.52%.

First American Financial is a leading provider of title insurance and settlement services to the real estate and mortgage industries in the U.S. It outpaced estimates in all the trailing four quarters with an average beat of 14.32%.

Arch Capital offers property, casualty, and mortgage insurance and reinsurance products worldwide. It delivered positive surprises in all of the last four quarters, with an average beat of 9.27%.

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