Thursday, October 4, 2012

BRK.B: Buffett breaks out

Berkshire Hathaway Inc.'s  Class A shares are the playtoys of the 1%. The Class B  shares (BRK.B) issued by uber-patient investor Warren Buffett's company are for the rest of us.

BRK.B broke above its 55-day high of $89.95 this morning, triggering a Turtle Trading bull signal that has been confirmed by a rising force index, an indicator based on price and volume.

The stock began its most recent leg up on Sept. 28 from $88.30, but it has been on the rise since June 1, the last time the price was near its 55-day low (a level that triggers a Turtle Trading bear signal).

And on the weekly chart, the stock has been in an uptrend since late September 2011.

Today's swing high of $90.40 stands above the previous major swing high of $87.65 set in February 2011. The power of the momentum is demonstrated by the fact that the price remains above its 55-day high well after the breakout, without significant retracement.

Further confirmation of the Turtle bull signal comes from transaction price analysis. The fair price zone on a one-day one-minute chart runs from $88.66 to $89.95, encompassing 68.2% of transactions surrounding the most-traded price, $89.40.

However, BRK.B has been trading above the zone for most of the day and is in the process of establishing a new popular price at $90.13 or so. This is extremely bullish for the near-term.

Buffett's investing philosophy is based on looking for company's that he can hold on to for the long term He wants steady growth and prefers that profits be retained within the company rather than paid out as dividends.

KO remains his top holding, as it has been for decades, followed by WFC and IBM. A full list of his holdings is available here.

Berk is not a very exciting company, frankly, and perhaps as a result, it's covered by only a few analysts. They are, however, unanimous in their assessment: The analyst enthusiasm index stands at 100%.

Berkshire Hathaway's return on equity is 8% -- that's in the slow-and-steady range -- and it has no long-term debt.

Annual earnings were hammered by the recession, like everyone's, but Berkshire Hathaway remained profitable throughout. It his a post recession earnings peak in 2010, and then stumbled in 2011 for a lower profit.

Quarterly profits have been all over the map the past 12 periods. The most recent quarter has the highest earnings of 2012, but it stands below the peak quarter of 2011. Of the past 11 quarters, six have shown upside earnings surprises, four surprised to the downside and analysts nailed one quarter for no surprise.

Institutions own only 18% of shares, whose price is above par. It takes $1.49 in shares to control a dollar in sales.

BRK.B on average trades 5.5 million shares a day. the options strike price inventory isn't particularly broad, but open interest runs to the three  and four figures near the money. The front-month at-the-money calls have a bid/ask spread of only 3%, which is quite narrow.

Implied volatility is quite low, at 15%. It stands in the lower half of the six-month range and has been declining the past few days.

Options are pricing in confidence that 68.2% of trades over the next month will fall between $86.41 and $93.99. Options activity today is a bit slow, running at 85% of the five-day average volume. Calls lead at 15% above the average, compared to 36% below average for puts.

Berkshire Hathaway next publishes earnings on Nov. 7.

Decision for my account: Under Turtle rules I would take the trade if I could, but I'm maxed out on my account and can't add any more Turtle positions until an existing position is closed.

If I were trading based on traditional support and resistance, I would open a bull position based on the break above previous resistance.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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