James Brumley, The Motley Fool
6 min read
Are you worried enough about rising interest rates jump-starting a recession that you’re looking for ways of sidestepping the effect of such an economic headwind? It’s not a terrible idea to at least start making a mental plan for that possibility.
You may have considered Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) to fill that role. Its wholly owned, private businesses generate plenty of cash flow regardless of the economic backdrop, after all.
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But how do Berkshire shares actually perform during recessions? It’s not like the data doesn’t exist.
What makes Berkshire Hathaway different?
You probably know Berkshire Hathaway best by its stock picks. Although they’re not built to be an actively managed mutual fund, its equity holdings — and changes to these holdings — are closely followed by investors looking for some new ideas for their own portfolios.
That’s far from all that Berkshire is, though. Indeed, only about one-third of the conglomerate’s current market cap of $1.1 trillion reflects the value of its individual stock holdings. More than another third of Berkshire Hathaway’s current value is the implied value of the several dozen private enterprises that it wholly owns. These businesses include Shaw flooring, Fruit of the Loom, GEICO insurance, Clayton Homes, Duracell, and Dairy Queen, just to name a few.
These businesses’ results are recorded and reported differently as well.
Changes in the value of Berkshire’s stock holdings are reported as investment gains and losses every quarter, whether they’re realized or unrealized. These changes can be pretty dramatic from one quarter to the next, too, largely reflecting the broad market’s ebb and flow. Since they’re outright owned, however, the net profits that Berkshire’s wholly owned outfits generate in any given quarter are spendable, liquid cash that’s added directly to the company’s net earnings total. For perspective on this figure, the second quarter’s operating earnings were a fairly typical $13 billion.
This is what makes Berkshire a seemingly better bet in tough market environments. Stocks may be underperforming because investors are afraid to buy or even hold them. These privately managed cash cows, however, are largely unaffected by economic headwinds.
