After Buffett announced his retirement, Berkshire's stock price "fell into a slump"

Concerns in the market triggered by Buffett's retirement news are dragging down Berkshire Hathaway's stock performance. Since the announcement at the annual meeting on May 3 that he would step down as CEO by the end of the year, the company's stock price has fallen by more than 10%.

Analysts believe that the weak stock price reflects investors' worries about multiple factors, including the fading of the "Buffett premium." This decline has caused Berkshire to lag behind the S&P 500 index by more than 20 percentage points, whereas the stock had outperformed the market earlier this year.

Despite facing uncertainties due to leadership changes, the company's three core businesses (insurance, railroads, and electric utilities) remain in good shape, and the company holds over $330 billion in cash, accounting for about one-third of its $1 trillion market value, providing ample ammunition for future buybacks, dividends, or large acquisitions.

UBS analyst Brian Meredith stated that Berkshire is no different from before Buffett announced his resignation in April, and he maintains a buy rating on the stock with a target price of $892,120, representing a 23% increase from current levels.

Multiple Factors Weighing on Stock Performance

The weakness in Berkshire's stock price stems from a combination of factors.

First, the concerns about the fading "Buffett premium" contribute to the weak stock price. The 94-year-old Buffett plans to continue serving as chairman until 2026, but the market is uneasy about the lack of transparency regarding the leadership transition.

Berkshire has not disclosed the executive team arrangements following Greg Abel's succession as CEO, and it is unclear whether 73-year-old insurance head Ajit Jain will remain. The status of Todd Combs and Ted Weschler, who manage about 10% of the stock portfolio, is also uncertain.

CFRA analyst Cathy Seifert stated, "Investors are highly sensitive to the power transition, and the Buffett premium is being stripped from the stock price."

In addition to the fading "Buffett premium," investors are also concerned that the property casualty insurance cycle has peaked, that the company has been making few new investments, and that it has not conducted stock buybacks for over a year. The market has recently shifted from defensive stocks like Berkshire to other investment targets, further exacerbating the selling pressure.

Despite the stock price decline, valuation attractiveness is emerging. Berkshire's Class A shares are currently trading at about $725,000, with a valuation multiple of less than 1.6 times relative to the June 30 book value of $461,000, which is in line with recent averages.

Based on expected earnings for 2025, the price-to-earnings ratio is about 24 times, comparable to the S&P 500 index.

If using the "normalized earnings" non-GAAP metric recognized by Buffett, considering the profit contributions from portfolio companies like Apple, Coca-Cola, and Bank of America, Berkshire's price-to-earnings ratio drops to about 20 times, making the valuation even more attractive.

Acquisition Opportunities May Become Catalysts

According to media reports, significant acquisitions could become a key factor driving the stock price.

If Union Pacific successfully negotiates a merger with Norfolk Southern, Berkshire may acquire the major eastern railroad operator CSX, creating a transcontinental railroad network According to UBS, it may spend over $80 billion, but it could enhance earnings by 8% in 2026.

Another potential target is Occidental Petroleum. Although Buffett stated he does not want to fully acquire this company, successor Greg Abel may hold a different view. Such a deal would cost about $45 billion, well within Berkshire's capacity.

In addition, restarting the stock buyback program would send a positive signal that management believes the stock price is attractive. The company has not repurchased shares since May 2024, and Abel has not significantly increased his personal holdings since March 2023.

Considering cash reserves and profitability, Berkshire could even start distributing a 2% dividend, aligning with companies of similar size.

Three Core Business Foundations Remain Strong

Berkshire's three core businesses of insurance, railroads, and electric utilities continue to perform strongly. The company's annual operating income is about $45 billion, and it is expected that by the end of 2026, the book value per share could rise to $525,000, with the current stock price equivalent to 1.4 times the forward book value.

As one of the largest property and casualty insurance companies in the world, Berkshire's premium growth has slowed this year but remains in the 4%-5% range. Its third-largest auto insurer, Geico, has restored high profitability after technological upgrades and is ready for expansion.

The electric utility business, Berkshire Hathaway Energy, deploys $10 billion annually for various projects and is expected to benefit from the artificial intelligence boom. Burlington Northern Santa Fe Railroad, along with Union Pacific, jointly dominates the freight market in the western United States