With the S&P 500 surging nearly 90% higher in the past five years, and 20% in the past year alone, it's undoubtedly more difficult to find a good deal in the stock market these days. But good investments are certainly still out there -- especially if you plan on holding them a Foolishly long time.
One stock I have my eyes on is famed investor Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Not only has it pulled back a few percentage points since it reported its third-quarter earnings earlier this month, making it slightly more attractive, but it also represents a good way for investors to buy one of the world's most rock-solid corporations at a reasonable price -- a rarity in this market.
The raw numbers
If you've followed Berkshire recently, you've probably seen the bearish headlines surfacing after the company's third-quarter earnings release. Berkshire's insurance segment posted a massive underwriting loss of $1.4 billion, weighing significantly on operating income and ultimately leading to a 29% year-over-year decline in the key metric. The culprit? Three major hurricanes -- Harvey, Irma, and Maria -- and an earthquake in Mexico.
But these underwriting losses only masked what remains a grade-A business. Indeed, a closer look at the quarter's results highlights the very core strength of Berkshire: It's a collection of wonderful businesses, giving investors sustainable lucrative operating income -- even when disasters hit. Berkshire's insurance-investment income rose from $850 million in the year-ago quarter to over $1 billion. Railroad, utilities, and energy operating income increased from $1.95 billion to over $2 billion. And Berkshire's "other businesses" segment was flat year over year, but notably contributed a significant $2 billion of operating income for the quarter.
And even these stats don't totally highlight the strength of Berkshire's business. Consider the growth in Berkshire's book value per share. As an insurer that carries float, and as a conglomerate in the business of making acquisitions and maintaining a significant portfolio of securities, the trajectory of Berkshire's book value matters more than it might at companies whose value is more closely tied to their ability to generate earnings. Berkshire's book value in Q3 was $187 billion, up from $164 billion in the year-ago quarter.
And we still haven't got to the best part...
About that war chest
Here's where things really get interesting -- from both an opportunity and a risk standpoint. Thanks to Berkshire's impressive ability to produce substantial operating cash flow, the Oracle of Omaha has built up a substantial cash hoard of $109 billion, up 28% from the $85 billion of cash and cash equivalents Berkshire had in the year-ago quarter.
If Berkshire can deploy its war chest effectively -- something it has done time and time again over the years -- shareholders could suddenly have some new, valuable assets under their belts. On the other hand, until Buffett can put this cash to work, what could be a massive opportunity to increase per-share intrinsic value is ultimately a risk; the longer Berkshire has to wait to find valuable assets for this cash, the more growth potential Berkshire misses out on.
But investors should rest assured that Buffett isn't sitting on his laurels with this cash. "I hate cash," Buffett recently told CNBC. He went on to say that he wants to "buy a big business," but that the price needs to be right.
Of course, there are other ways Berkshire can deploy its cash beyond making large acquisitions, including paying a dividend, raising Berkshire's share repurchase threshold from 1.2 times book value to 1.5 times book value, or building significant equity positions in large publicly traded companies (the way Berkshire recently opportunistically did with Apple).
My bet is that Berkshire will find a way to deploy this cash that builds surprising shareholder value. This is what Buffett and his fellow partner Charlie Munger have done for decades, and I'm confident they can do it again. As Buffett has admitted, it could be said that he is "wired for capital allocation." He certainly has both the track record and the experience.
Combining the growing value of Berkshire's collection of enduring businesses with its record $109 billion war chest, I think the market is undervaluing Berkshire's potential at 1.5 times book value. Indeed, considering Berkshire's excellent assets, its deeply ingrained culture of long-term thinking, and a number of talented potential successors already working within the company, Berkshire looks poised to thrive well beyond the life of its CEO and chairman.
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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.