He told you it was undervalued: Buffett’s Berkshire stock surges 25% in two months

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One of the hottest U.S. stocks this year belongs to a man who usually warns investors to avoid chasing hot stocks.

On Monday, the Class B shares of Berkshire Hathaway Inc., billionaire investor Warren Buffett’s holding company, rose $1.78, or 2.2%, to $81.91, a new 52-week high.

The stock now is up almost 25% year to date -- compared with a mere 0.05% advance for the Standard & Poor’s 500 index.

After mostly flatlining from mid-August to mid-January, Berkshire shares sparked to life on Jan. 20. That was when Buffett called the stock “undervalued” historically compared with its book value, or the net asset value per share of the company’s diverse operations (insurance, manufacturing, utilities, retailing and more).

‘Berkshire’s price is often related to book value in some way that makes a fair degree of sense,” Buffett said in an interview with Bloomberg News that day. “On a historical basis, Berkshire is selling quite low relative to book value.”

On Jan. 20, Berkshire shares were priced at about 1.3 times the company’s then most recent per-share book value figure (as of Sept. 30). Over the previous 15 years the stock’s price-to-book ratio had averaged about 1.76, according to Bloomberg data.

Whether by plan or by coincidence, Buffett’s relatively rare endorsement of Berkshire shares was a bullish set-up for what followed.

First, in connection with Berkshire’s previously announced cash-and-stock deal to buy rail giant Burlington Northern Santa Fe, Berkshire shareholders on Jan. 20 approved a 50-for-1 stock split that reduced the dollar price of the firm’s Class B shares to the lowest level ever.

That made the stock vastly more accessible to average investors literally overnight: The shares closed at $3,476 on Jan. 20 and opened for trading at about $70.50 on Jan. 21.

Second, with Berkshire stock no longer priced out of most investors’ reach, Standard & Poor’s added the shares to its S&P 500 index on Feb. 12. That created additional demand from passive investors who just want their portfolios to replicate the performance of the S&P 500.

Third, some investors on Monday probably were reacting to Buffett’s weekend release of Berkshire’s 2009 financial results (earnings jumped 61% from 2008’s depressed results, to $8.05 billion), and his always educational and entertaining annual letter to shareholders.

In the letter covering 2009 results Buffett continued to stress that he disliked using Berkshire shares to partly fund the Burlington Northern deal because he believed that the stock was undervalued. But when the deal was announced on Nov. 3 Berkshire Class B shares sold for the equivalent of $66.50 -- or 19% below Monday’s price.

Buffett’s letter, dated Friday, didn’t offer any fresh insight into how he perceived his stock’s relative value with the price above $80. Berkshire’s price-to-book-value ratio now is 1.45 based on the higher share price and the increase in book value as of Dec. 31.

Buffett, of course, has always sought to have his investors think very long-term about their Berkshire stock, not about short-term moves.

But Wall Street has a different agenda. On Monday, analysts at Keefe, Bruyette & Woods told their research clients that the quick rally in Berkshire stock this year had left the shares “nearing an appropriate valuation.” They cut their rating to the equivalent of “hold” from “buy.”

-- Tom Petruno