(Bloomberg) — Days before his first annual meeting as the chief executive officer of Berkshire Hathaway Inc., Greg Abel is facing a problem that seldom confronted his legendary predecessor: a floundering stock price.<\/p>\n
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Once synonymous with consistent outperformance, the $1 trillion conglomerate\u2019s shares have been trounced by the broader market since Warren Buffett announced he was retiring and handing Abel the reins a year ago. As of Wednesday, the Class B shares have lagged the S&P 500 Index by more than 37 percentage points over the past twelve months, the worst one-year stretch since 2000.<\/p>\n
Recent hits related to holdings such as Kraft Heinz Co. can explain some of the doldrums, as can a pricey, AI-obsessed stock market that\u2019s left Berkshire few deep-value opportunities for deploying its $373 billion cash pile. But while Abel is likely to touch on those subjects during Saturday\u2019s meeting, another reason for the slump may be harder to address: with the Oracle of Omaha gone, some investors are taking a less forgiving view of Berkshire\u2019s flaws \u2014 at least until the 63-year old CEO can earn some of the trust that Buffett and his late business partner Charlie Munger once commanded.<\/p>\n
\u201cAs investors, we welcome Abel\u2019s \u2018stay-the-course\u2019 approach,\u201d said Christopher Davis at Hudson Value Partners, which has held the company\u2019s shares since 2019. However, \u201cit seems the market may be looking to see him execute a classic Berkshire investment as evidence that the machine can run just the same with a new operator.\u201d<\/p>\n
The Buffett Premium<\/p>\n
Berkshire\u2019s ailing stock price highlights the challenge that Abel \u2014 who took over as CEO in January \u2014 faces as he sits at the helm of a company that will long bear the stamp of the 95-year old Buffett, widely considered one of history\u2019s greatest investors. A Berkshire spokesperson declined to comment.<\/p>\n
Driven by Buffett\u2019s celebrated stock picking and shrewd capital allocation, the company\u2019s shares routinely beat the S&P 500 over its 61-year history as a conglomerate. Even though the gap has narrowed in recent decades, the performance remains impressive: Berkshire\u2019s Class B shares have notched an average annual gain of 11% since 1997 under Buffett, a full percentage point above the S&P 500\u2019s annualized total return in that time span.<\/p>\n
Investors happily paid a so-called Buffett premium as a result, typically valuing the company\u2019s stock above the broader market. But while Abel has pledged to follow Buffett\u2019s approach to investing and managing risk \u2014 Saturday\u2019s meeting is branded with the slogan \u201cThe Legacy Continues\u201d \u2014 it may be years before shareholders are confident that Abel can approximate his predecessor\u2019s investing touch.<\/p>\n
Buffett created \u201ca mystique, a psychological kind of aura around the company,\u201d said Lawrence Cunningham, an author of several books about Buffett and longtime Berkshire shareholder. \u201cIf he\u2019s not going to be there, you\u2019re going see some erosion of that mystique, and that\u2019s going to show up in the stock price.\u201d<\/p>\n
Some of that apprehension is also evident in Berkshire\u2019s price-to-book ratio. The gauge has drifted lower in the past year and now stands at about 1.4, compared to almost 1.8 before last year\u2019s annual gathering \u2014 though it has been both higher and lower throughout Berkshire\u2019s history.<\/p>\n
Buffett stepping down \u201cwas somewhat of a catalyst for some people that held Berkshire stock to sell, given the valuation,\u201d said UBS Group AG insurance analyst Brian Meredith.<\/p>\n
Analysts also point out that Abel \u2014 a skilled operator who turned the firm\u2019s energy business into one of its largest profit engines \u2014 nevertheless lacks a background in asset management, a key remit for Berkshire.<\/p>\n
Despite a strong operational background, Abel \u201chas never professionally managed money,\u201d said Cathy Seifert, an analyst for CFRA Research.<\/p>\n
Charges, Disclosure and AI<\/p>\n
At the same time, catalysts for stock weakness that had percolated for years are being thrown into sharper relief now that Buffett is gone.<\/p>\n
Weak growth in revenue and disappointing earnings at the conglomerate\u2019s insurance businesses have weighed on investor sentiment. Berkshire\u2019s insurance operating underwriting earnings slumped more than 54% in the fourth quarter, while peers managed to beat expectations in the period.<\/p>\n
And last year, a combined $8.3 billion impairment on investments in Kraft Heinz Co. and Occidental Petroleum Corp. dented Berkshire\u2019s reputation as a successful acquirer, according to Seifert. Operating profits overall declined 6% last year.<\/p>\n
The firm\u2019s well-known lack of disclosure is another factor. Berkshire is the only public company its size to not have an investor relations function and to not organize investor days beyond its annual meeting in Omaha each May. While that may have been a forgivable quirk during the six decades that Buffett and Munger ran the company, Berkshire\u2019s lackluster stock price suggests shareholders haven\u2019t yet extended the same trust to Abel.<\/p>\n
Then there\u2019s the question of broader market valuations. With excitement over artificial intelligence helping drive stocks to fresh records despite tensions in the Middle East, equities are pricey on many metrics \u2014 including one favored by Buffett himself. That measure, which pits total market capitalization of US stocks against gross domestic product, currently stands at over 220%, near a record high.<\/p>\n
\u201cThe market may not expect Abel to execute long-term home runs like Buffett, but likely wants to see how he identifies value-oriented names, which by its nature takes time,\u201d Bloomberg Intelligence analyst Matthew Palazola said.<\/p>\n
Even small steps from Abel have been encouraging for shareholders eager to hear good news. Berkshire shares climbed after the company restarted buybacks in early March, after more than a year without any shareholder payout.<\/p>\n
Abel has also shaken up the management team, adding a general counsel and parting with two important executives. Saturday\u2019s meeting will also shed more light on Berkshire\u2019s deep executive bench, with BNSF\u2019s Katie Farmer and NetJets\u2019s Adam Johnson expected to take questions from shareholders.<\/p>\n
And a short-term focus on Berkshire\u2019s stock price is anathema to many of the firm\u2019s true-believers, who abide by the advice of Buffett\u2019s mentor, Benjamin Graham. A value-investing pioneer, Graham believed that a company\u2019s share price will eventually line up with its fundamentals over time.<\/p>\n
\u201cIf anybody has read Warren Buffett, the last thing anybody at Berkshire should do is pay attention to the stock prices,\u201d said Cunningham, who authored a book titled \u201cHow to Think Like Benjamin Graham and Invest Like Warren Buffett.\u201d<\/p>\n
For now, however, investors are counting on Abel to show he can keep Berkshire\u2019s fundamentals strong.<\/p>\n
\u201cBuffett had obviously enjoyed a tremendous amount of trust and respect,\u201d said Meyer Shields, an analyst at Keefe, Bruyette & Woods. \u201cI don\u2019t think it\u2019s in any way a criticism of Greg Abel to say that he has very, very large shoes to fill.\u201d<\/p>\n
–With assistance from Matt Turner.<\/p>\n
Most Read from Bloomberg Businessweek<\/p>\n
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