Only a few dozen companies in the world make the cut...
Some of these companies are "capital efficient." Others hold "trophy assets."
Importantly, these companies all enjoy a unique product or service that gives them a huge advantage over their competitors: Their brand, distribution network, or a combination of several factors.
These companies dominate their industries. They're often the largest in their sectors. You can go almost anywhere in the world and find their products or services. They have fortress-like balance sheets, high operating margins, and look after shareholders with dividends and share buybacks.
We call these companies the "Global Elite." Investing in them is one of our favorite strategies. And if you buy them at the right price, they outperform the market over the long term...
Today, one Global Elite stock is down roughly 10% from its 52-week high. Yet remarkably, it's trading at valuation levels just above its historical floor.
The man behind the company – Warren Buffett – is one of the greatest living investors of the past century.
Buffett has been at the helm of his holding company Berkshire Hathaway (NYSE: BRK-B) for more than 50 years. Since 1965 through the end of 2017 (the last annual data available), he grew book value for his shareholders at an annualized rate of 19%. According to the company, the per-share market value grew at a compounded annualized rate of 21%... an overall gain of 2,404,748%. By comparison, the total gain for the S&P 500 over the same period came in at 15,508% – or about 10% annualized.
It's not hard to see why we consider Berkshire a Global Elite company. It's a financial behemoth with a market cap of almost $500 billion. It's the fifth-largest publicly traded company in the U.S., behind only tech titans Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).
Berkshire holds a diverse range of businesses, including one of the best businesses in the world: insurance.
Berkshire began its insurance business back in 1967, when it bought National Indemnity for $8.6 million... and it has grown ever since. Today, Berkshire is best known for owning GEICO insurance. The company brought in $240 billion in sales in 2017, more than $60 billion of which came from insurance.
Among its other significant businesses are railway firm BNSF Railway, Berkshire Hathaway Energy (formerly MidAmerican Energy), specialty-chemicals manufacturer Lubrizol, industrial holding company Marmon, and candy maker See's Candies.
Berkshire also owns large stakes in fellow Global Elite firms like Apple, credit-card giant American Express (AXP), soft-drink titan Coca-Cola (KO), and one of the largest banks in the U.S., Wells Fargo (WFC).
Over the past 12 months, the company has generated around $260 billion in revenue. About $21 billion came through the doors in free cash flow. The company's assets now total $730 billion – about $100 billion of that is in cash and short-term investments as of September 30, 2018. Meanwhile, total debt is just $97 billion.
We hope you're starting to understand just how powerful this company is. That's why banks and financial institutions turn to Buffett when they're in need of a helping hand. He always has cash available for rainy days... And he knows how to stack the odds in his favor.
You might imagine that because of Buffett's legendary success and Berkshire's growth, shares would be too expensive. Over the last 22 years, Berkshire's "B-shares" have grown from $20 to around $200 today. (In 1996, Buffett offered B-shares as a more affordable option for investors looking for more flexibility. Today, the company's "A-shares" trade for around $300,000.)
As an investor, it's easy to think you've missed the boat. But that would be a mistake.
All you need to know is this: You can't value what a company is worth simply by looking at its nominal share price. The only thing that matters is what you get for the price you pay. It could be a multiple of earnings, cash flow, assets, or book value.
With Berkshire, we like to look at book value. That's what Buffett focuses on, too. As he wrote in his 2016 shareholder letter...
I am authorized to buy large amounts of Berkshire shares at 120% or less of book value because our Board has concluded that purchases at that level clearly bring an instant and material benefit to continuing shareholders. By our estimate, a 120%-of-book price is a significant discount to Berkshire's intrinsic value, a spread that is appropriate because calculations of intrinsic value can't be precise.
Remember, the company has around $100 billion in cash. Buying back its own shares would be a breeze... and Buffett considers them a bargain at 1.2 times book value...
Over the past few years, Berkshire's board has authorized share repurchases at prices no higher than a 20% premium over book (i.e. 1.2 times book value). This past July, the board gave Buffett and his partner Charlie Munger approval to buy whenever they consider shares to trade below intrinsic value. But Berkshire said it wouldn't make any purchases if it would reduce the company's consolidated cash and cash equivalents holdings below $20 billion.
They bought $928 million worth of shares in the third quarter.
Shares trade for 1.3 times book value today – nearing the key level. Yes, prices could drop further from these levels. But it's cheap enough that Buffett is buying... And we think buying shares at 1.3 times book value provides enough margin of safety. As you can see from the chart above, investors have done well over the past 10 years buying the stock around these levels.
Sometimes investing is simple.
Editor's note: Dr. David "Doc" Eifrig told his Retirement Millionaire readers to buy shares of Berkshire Hathaway back in April 2009... just after the stock bottomed during the global financial crisis. Shares were trading around 1.3 times book value at the time. Readers who followed Doc's advice are up 255%.