Key takeaways

  • Shares of Berkshire Hathaway have fallen 12% since CEO Warren Buffett announced his retirement in May.
  • Some market watchers have blamed the disappearance of the so-called “Buffett premium”—investors’ willingness to pay a little extra for Buffett’s experience and track record of outperformance.
  • Morningstar senior equity analyst Greggory Warren attributes the stock’s decline to other factors.

Has Berkshire Hathaway BRK.A/BRK.B lost its edge? Shares of Warren Buffett’s investment conglomerate have fallen more than 12% since early May, when the legendary CEO announced his intention to step down after 60 years at the helm. The slide continued during intraday trading on Monday following a second-quarter earnings report that disappointed investors.

The stock’s slide has some questioning whether the so-called “Buffett premium”—the extra cushion in the stock price that investors are willing to pay in exchange for Buffett’s long track record of stock-picking success—is fading.

But while this year’s disappointing returns have coincided with a renewed focus on succession at the firm, Morningstar senior equity analyst Greggory Warren says, “The Buffett premium hasn’t been there for a while.” He thinks other factors are at play.

For one, Berkshire tends to lag the broader market during major rallies, such as the one that’s pushed stocks higher since mid-April. Berkshire has also been trading above its typical valuation, and it may have been due for a reset.

A track record of success

Under the leadership of Buffett and longtime vice chair Charlie Munger, who died in 2023, Berkshire Hathaway has become synonymous with stock market success thanks to its careful dealmaking, patient approach, and seemingly unwavering faith in the American economy’s ability to generate profits. Buffett’s stellar track record in stock picking cemented his place in history as the “Oracle of Omaha.”

Berkshire crossed $1 trillion in market capitalization for the first time late last summer. Buffett will be replaced by Greg Abel, the vice chairman of Berkshire’s noninsurance operations, next year.

The ‘Buffett premium’ is outdated

Buffett is considered one of the best stock pickers in history. His fundamentals-driven approach, which focuses on attractively valued businesses with steady cash flows and durable competitive advantages, has been his blueprint for reliable returns for decades. That expertise once commanded a healthy premium from investors, but Warren says this effect hasn’t been in full force for the past decade or so.

“[It] was there for a long time because Buffett and Munger were able to find places to put capital to work,” he explains. “For a good 40 or 50 years, they had an information advantage and weren’t fighting a lot of competition.” But financial information is now much more readily available. At the same time, private markets are much more robust, and private equity firms are competing for deals that may have once attracted Berkshire’s attention. On top of that, Buffett is generally averse to bidding wars. The result is that overall, “[Berkshire’s] ability to do the deals they have in the past has diminished,” Warren says.

Key Morningstar metrics for Berkshire Hathaway

  • Fair Value Estimate BRK.A: $730,500.00
  • Fair Value Estimate BRK.B: $487.00
  • Morningstar Rating: ★★★
  • Economic Moat: Narrow
  • Morningstar Uncertainty Rating: Low

Valuations remain within their historical range

But even without that premium, Berkshire’s shares are more expensive than they usually are by certain measures. One example is the price/book ratio, which compares a company’s value based on its balance sheet to its valuation based on its stock price.

Warren says Berkshire is trading at roughly 1.6 times its book value, below its peak near 1.8 in the spring but higher than its longer-run average of 1.4-1.5 times. Meanwhile, Class A shares of Berkshire are trading at $711,480, putting them just slightly in undervalued territory, according to Morningstar’s estimate of the stock’s worth. At the beginning of the year, Berkshire was trading at a higher premium to the estimate.

Analysts at UBS, led by Brian Meredith, recently raised their 12-month price target for Class A shares to $892,120, and they believe the stock is trading at a 4% premium to its intrinsic value. Shares traded at a much higher premium of 17% before they began to plunge in May, according to the analysts, who maintain a “Buy” rating on the stock.

Berkshire stock as a defensive play

So what explains the stock’s slide? Some of the losses might stem from investors’ view of Berkshire as a defensive stock in a risk-on market. In a research note last week, UBS analysts noted that Berkshire’s shares tend to outperform the market and other financial stocks during economic slowdowns and market turbulence. “We attribute this to its diverse mix of business and a very strong capital position,” they wrote.

Morningstar’s Warren points out that it’s not unusual for Berkshire’s stock to fall behind when the rest of the market rises and investors turn toward riskier bets like tech stocks rather than tried-and-true value plays. “When the S&P 500 is up more than 10% or 15%, Berkshire is usually a laggard,” Warren says.

According to Warren, the last two years (when the market soared and Berkshire soared along with it) could be considered outliers, while the firm’s recent underperformance is a return to the long-term trend. These last few months have seen growthy plays like tech stocks rebound as the shocks from tariff announcements have faded and economic data has remained solid.

“The fact that it’s given up [12%] since May doesn’t surprise me,” says Warren, especially in the context of an elevated price/book ratio. “I think the Buffett announcement helped spur [some losses] … but there was some air that needed to come out of those tires.”

What’s next for Berkshire

With Buffett’s departure slated for the end of the year, investors will be laser-focused on Abel’s performance in his first months as CEO. Warren expects Abel to be held to a different standard than his predecessors. “He’s going to have to leave his mark and show that he’s willing to correct some of the problems we see,” he says. “He’s going to be under a much tighter microscope than Buffett ever was.”

Warren says he’s not worried about Berkshire’s fundamentals. “The business runs itself,” he says, and its diversified portfolio means that good periods in one arm can offset bad periods in another. That was on display in the firm’s second-quarter earnings, released Saturday; solid results in the insurance business offset weaker results in other areas.

Meanwhile, the firm’s $344 billion cash pile gives Abel and the executive team plenty of dry powder if the next acquisition opportunity arises or they need to support share prices via a buyback or dividend. Because Berkshire shares are trading at a premium, UBS analysts do not expect any stock buybacks in 2025 or 2026.

Front and center for investors in the more immediate term will be a potential railroad merger. News of a merger between Union Pacific and Norfolk Southern has fueled speculation that BNSF, Berkshire’s railroad business, may look to acquire CSX to remain competitive.

Subscribe to get Morningstar insights in your inbox