Warren Buffett’s Berkshire Hathaway has experienced significant success this year, with shares reaching a record high due to strong earnings. However, this impressive performance has prompted caution from analyst James Shanahan at Edward Jones. Shanahan downgraded Berkshire shares to a hold rating from buy and removed B shares from the firm’s “U.S. stock focus” list. He cited the rapid price appreciation as the main reason for the downgrade, believing that the current share price already reflects the positive earnings outlook. Berkshire’s class A shares have rallied over 15% this year, outperforming its peers in the financial services industry.
Berkshire Hathaway’s operating earnings in the second quarter increased by 6.6% compared to the previous year. Additionally, the company saw significant gains from its stock portfolio and Treasury holdings, resulting in a substantial cash pile of $147.38 billion at the end of June. Shanahan attributes the share price appreciation to an optimistic earnings outlook, driven by increased investment activity and income from the company’s large cash holdings. This is not the first time Shanahan has downgraded Berkshire, as he made a similar valuation call in April 2022. With only seven analysts covering the conglomerate, the limited information provided about its operating businesses and the difficulty in accessing management pose challenges for analysts. Moreover, trading activity in Berkshire’s high-priced Class A shares is relatively low.
While Berkshire Hathaway has seen remarkable success this year, James Shanahan’s cautionary downgrade reflects concerns about the stock’s current share price. Despite the positive outlook for earnings, the rapid appreciation in value may have already been factored into the share price. Berkshire’s strong performance can be attributed to its diverse group of operating companies, the acceleration in investment activity, and the income generated from its substantial cash holdings. However, the limited number of analysts covering the conglomerate and the challenges in obtaining information further complicate the evaluation of its potential future performance. As a result, it is important for investors to carefully consider the current circumstances and exercise caution when investing in Berkshire Hathaway.