Days before his first annual meeting as the chief executive officer of Berkshire Hathaway Inc., Greg Abel is facing a problem that seldom confronted his legendary predecessor: a floundering stock price.

Once synonymous with consistent outperformance, the US$1 trillion conglomerate’s shares have been trounced by the broader market since Warren Buffett announced he was retiring and handing Abel the reins a year ago. As of Wednesday, the Class B shares have lagged the S&P 500 Index by more than 37 percentage points over the past twelve months, the worst one-year stretch since 2000. That’s caused Berkshire’s market capitalization to decline US$139 billion over that span.

Recent hits related to holdings such as Kraft Heinz Co. can explain some of the doldrums, as can a pricey, AI-obsessed stock market that’s left Berkshire few deep-value opportunities for deploying its US$373 billion cash pile. But while Abel is likely to touch on those subjects during Saturday’s meeting, another reason for the slump may be harder to address: with the Oracle of Omaha gone, some investors are taking a less forgiving view of Berkshire’s flaws — at least until the 63-year old chief executive can earn some of the trust that Buffett and his late business partner Charlie Munger once commanded.

“As investors, we welcome Abel’s ‘stay-the-course’ approach,” said Christopher Davis at Hudson Value Partners, which has held the company’s shares since 2019. However, “it seems the market may be looking to see him execute a classic Berkshire investment as evidence that the machine can run just the same with a new operator.”

The buffett premium

Berkshire’s ailing stock price highlights the challenge that Abel — who took over as chief executive in January — faces as he sits at the helm of a company that will long bear the stamp of the 95-year old Buffett, widely considered one of history’s greatest investors. A Berkshire spokesperson declined to comment.

Driven by Buffett’s celebrated stock picking and shrewd capital allocation, the company’s shares routinely beat the S&P 500 over its 61-year history as a conglomerate. Even though the gap has narrowed in recent decades, the performance remains impressive: Berkshire’s Class B shares have notched an average annual gain of 11 per cent since 1997 under Buffett, a full percentage point above the S&P 500’s annualized total return in that time span.

Investors happily paid a so-called Buffett premium as a result, typically valuing the company’s stock above the broader market. But while Abel has pledged to follow Buffett’s approach to investing and managing risk — Saturday’s meeting is branded with the slogan “The Legacy Continues” — it may be years before shareholders are confident that Abel can approximate his predecessor’s investing touch.

Buffett created “a mystique, a psychological kind of aura around the company,” said Lawrence Cunningham, an author of several books about Buffett and longtime Berkshire shareholder. “If he’s not going to be there, you’re going see some erosion of that mystique, and that’s going to show up in the stock price.”

Some of that apprehension is also evident in Berkshire’s price-to-book ratio. The gauge has drifted lower in the past year and now stands at about 1.4, compared to almost 1.8 before last year’s annual gathering — though it has been both higher and lower throughout Berkshire’s history.

Buffett stepping down “was somewhat of a catalyst for some people that held Berkshire stock to sell, given the valuation,” said UBS Group AG insurance analyst Brian Meredith.

Analysts also point out that Abel — a skilled operator who turned the firm’s energy business into one of its largest profit engines — nevertheless lacks a background in asset management, a key remit for Berkshire.

Despite a strong operational background, Abel “has never professionally managed money,” said Cathy Seifert, an analyst for CFRA Research.

Charges, disclosure and AI

At the same time, catalysts for stock weakness that had percolated for years are being thrown into sharper relief now that Buffett is gone.

Weak growth in revenue and disappointing earnings at the conglomerate’s insurance businesses have weighed on investor sentiment. Berkshire’s insurance operating underwriting earnings slumped more than 54 per cent in the fourth quarter, while peers managed to beat expectations in the period.

And last year, a combined US$8.3 billion impairment on investments in Kraft Heinz Co. and Occidental Petroleum Corp. dented Berkshire’s reputation as a successful acquirer, according to Seifert. Operating profits overall declined six per cent last year.

The firm’s well-known lack of disclosure is another factor. Berkshire is the only public company its size to not have an investor relations function and to not organize investor days beyond its annual meeting in Omaha each May. While that may have been a forgivable quirk during the six decades that Buffett and Munger ran the company, Berkshire’s lackluster stock price suggests shareholders haven’t yet extended the same trust to Abel.

Then there’s the question of broader market valuations. With excitement over artificial intelligence helping drive stocks to fresh records despite tensions in the Middle East, equities are pricey on many metrics — including one favored by Buffett himself. That measure, which pits total market capitalization of U.S. stocks against gross domestic product, currently stands at over 220 per cent, near a record high.

“The market may not expect Abel to execute long-term home runs like Buffett, but likely wants to see how he identifies value-oriented names, which by its nature takes time,” Bloomberg Intelligence analyst Matthew Palazola said.

Even small steps from Abel have been encouraging for shareholders eager to hear good news. Berkshire shares climbed after the company restarted buybacks in early March, after more than a year without any shareholder payout.

Abel has also shaken up the management team, adding a general counsel and parting with two important executives. Saturday’s meeting will also shed more light on Berkshire’s deep executive bench, with BNSF’s Katie Farmer and NetJets’s Adam Johnson expected to take questions from shareholders.

And a short-term focus on Berkshire’s stock price is anathema to many of the firm’s true-believers, who abide by the advice of Buffett’s mentor, Benjamin Graham. A value-investing pioneer, Graham believed that a company’s share price will eventually line up with its fundamentals over time.

“If anybody has read Warren Buffett, the last thing anybody at Berkshire should do is pay attention to the stock prices,” said Cunningham, who authored a book titled “How to Think Like Benjamin Graham and Invest Like Warren Buffett.”

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For now, however, investors are counting on Abel to show he can keep Berkshire’s fundamentals strong.

“Buffett had obviously enjoyed a tremendous amount of trust and respect,” said Meyer Shields, an analyst at Keefe, Bruyette & Woods. “I don’t think it’s in any way a criticism of Greg Abel to say that he has very, very large shoes to fill.”

With assistance from Matt Turner

Bloomberg.com