Buffett's Berkshire has Traded Down in Past Recessions, Making it a Defensive Pick for 2023

In times of economic downturn, Warren Buffett's Berkshire Hathaway company has a track record of outperforming the market due to its large cash pile and diversified business portfolio, according to Trade Algo. Based on the analysis of performance data, the Wall Street firm has concluded that the conglomerate has proven to be resilient leading into and through the last three recessions since the early 1990s. Compared to other financial stocks, Berkshire shares have outperformed the S&P 500 and other financial stocks.

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"BRK has outperformed the market and other financial stocks throughout the past three recessions thanks to its diverse business mix, a very strong balance sheet, and substantial liquidity," Trade Algo wrote in a note to investors. “In light of the uncertain economic outlook for the year 2023, we believe that Berkshire's stock could outperform." The analyst also characterized Berkshire's stock as a “defensive play in such a climate."

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As a conglomerate based in Omaha, the company's operating businesses include railroads, energy, insurance, home furnishing, and retailers among others, including a patchwork of companies. As a result of Berkshire's diversification of businesses, the company has always been able to weather turbulence in the economy even during difficult times.

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In its report on Berkshire Hathaway Insurance Operations, Trade Algo said fundamentally, Berkshire's insurance operations should not be impacted by a slowdown in the economy and the fundamental backdrop is favorable with an increase in commercial lines and "hard" reinsurance pricing as well as accretion from Alleghany's acquisition. Buffett has inked Buffett's biggest deal since 2016, an $11.6 billion deal with insurer Alleghany for $848.02 a share in cash, inking Buffett's biggest acquisition since he took over the company in 2016. In the fourth quarter of last year, the deal was closed.

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However, some of Berkshire's noninsurance businesses, such as its railroads, real estate operations, and other noninsurance products are more cyclical or economic sense, according to Trade Algo. In 2023, there could be headwinds for Berkshire Hathaway as a result of these businesses, according to Trade Algo.

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Trade Algo said Berkshire has traditionally been able to take advantage of economic slowdowns by investing in quality businesses at attractive prices, which helped offset any impact on its business.

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Buffett went on a buying spree during the volatile year of 2022 when the market was volatile. There were other transactions in which the conglomerate used significant amounts of cash in addition to the Alleghany deal, including Chevron, Occidental Petroleum, and Taiwan Semiconductor. Over the last year, Occidental Oil was the top-performing stock in the S&P 500, nearly doubling in value.

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In Meredith's opinion, BRK has proven to be an effective steward of its capital over the long term, and it maintains a substantial cash balance at all times. "An additional catalyst for the company may be the completion of accretive acquisitions or a higher share repurchase program than expected."

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It is predicted that the "Oracle of Omaha" may buy back more of his stock as Berkshire shares trade at a 20% discount to the conglomerate's intrinsic value.

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The company's stock has held up well in 2022 with a gain of 4%, however, it is 14% off its all-time high of $544,389.25, which was reached in March of 2022 when the stock hit its all-time high.

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Nearly $109 billion in cash was accumulated by the conglomerate by the end of September.