David Rolfe, well-known value investor and chief investment officer at Wedgewood Partners, is bullish on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). So bullish in fact, that the largest holding in Wedgewood’s portfolio is Berkshire Hathaway at 9.5%. Rolfe published an op-ed piece on MarketWatch today, March 25th, where he predicts that Buffett’s baby will significantly outperform the Russell 2000 over the next 10 years.
Rolfe freely admits that small caps have significantly out-returned Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) since 2009, but he doesn’t expect the trend to last much longer. “On the other hand, I believe that a proxy for the Russell 2000 (INDEXRUSSELL:RUT), the exchange-traded Vanguard Russell 2000 ETF VTWO -0.16% is more than priced for perfection. The ETF has outperformed Berkshire Hathaway’s B-shares over the course of this mighty bull market — up 245% cumulative versus the B shares’ 150% gain. But that’s yesterday’s news.”
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Small caps at top of cycle
It’s all about timing, and Rolfe argues that small caps are at the peak of their bull run and generally overvalued at this point. “The Russell 2000 Index’s 30% compound return since the beginning of this bull market in March 2009 has made the Russell 2000 significantly overvalued. According to investment manager Leuthold, the Russell 2000 Index’s relative valuation, currently at a 40% normalized P/E premium, hasn’t been this high since 1979. In addition, according to Citi Research, the Russell 2000 P/E, minus the broad market’s P/E, is at 34-year highs.”
Berkshire Hathaway will be worth all the gold in Fort Knox
Rolfe says all you have to do is follow the money. Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) will easily be worth more than the value of all the gold in Fort Knox by 2023, and he expects the stock price to at least double by then. He lays out his conservative, no-growth case below. “In 2013, Berkshire Hathaway generated $23 billion in pre-tax operating income. Over the next 10 years this assumed operating level would grow to a cumulative $230 billion. Retained after-tax earnings would pile up to about $150 to $160 billion. This accumulated cash hoard, plus the $40 billion or so currently sitting in Berkshire’s Omaha vault, would amount to two-thirds of Berkshire Hathaway’s current market cap — and about the same $200 billion value of the 147 million ounces of gold at Fort Knox.”