Conglomerate: short-term neutral, long-term attractive – factor certificates highly profitable in the short term, stocks remain the basis.

Last Updated: 18. Januar 2024By

The business situation of conglomerates is typically strongly correlated with the overall economic development due to their wide coverage across many industries.

Therefore, the outlook of these companies is also a leading indicator for the economic outlook. This premise was once again confirmed last year. At GESCO, the business situation of some subsidiaries was below expectations. In addition, orders indicate a declining demand. In line with this, the Federal Statistical Office recently reported a decrease in order backlogs in the manufacturing sector. In September, these were 5.4% below the previous year. The declines mainly affected the mechanical engineering sector and the automotive industry.

Mostly neutral market prospects

However, there is mostly no cause for concern when it comes to conglomerate stocks. Due to their high diversification across many industries, declines in individual subsidiaries can be well absorbed. In addition, many conglomerates have reduced their exposure to cyclical industries in recent years.

Berkshire Hathaway is currently benefiting from rising prices in the insurance business and even exceeded our expectations. Companies like GESCO also manage their business solidly due to their high equity ratio. With low costs for debt, it is easier to operate profitably in difficult times. In addition, the companies do not have to worry about refinancing and can continue to strengthen their business through acquisitions. Against this background, I am mostly neutral for the industry in the short term.

Significant recovery potential in the long term

Looking at the low stock valuations, I see long-term opportunities. Despite the expected decline in profits, GESCO remains moderately valued with a P/E ratio of 10 and also offers a good dividend yield.

Industry-wide, the P/E and P/C ratios of stocks are historically at a low level. The dim profit outlook is already priced in. In the long term, well-capitalized conglomerate stocks offer significant recovery potential due to the expected cyclical recovery in earnings and the opportunities for further external growth through acquisitions.

Good future prospects for Japanese conglomerates

Marubeni and Itochu have recorded slight declines in sales and profits. These primarily come from lower sales figures in the metal and minerals business. However, there are good prospects for Japanese conglomerates overall. In particular, the business with renewable energies will continue to expand. Both companies have raised their sales forecasts.

Berkshire Hathaway: Insurance business remains the most important pillar

In the first 9 months, Berkshire was highly profitable again with a profit of $58.6 billion. As a result of the majority acquisition of the gas station operator Pilot Travel Centers as well as higher premium income and investment income in the insurance business, sales increased by 21.1% to $271.1 billion.

The insurance business remains the most important operating profit pillar and enables Berkshire Hathaway to make profitable investments in the capital market due to the high time lag between receipt of premium income and payment of claims.

Berkshire Hathaway also has a large portfolio of stakes in other companies. The largest stakes include Apple, Bank of America, Coca-Cola, and Wells Fargo. These stakes have made a significant contribution to Berkshire Hathaway’s growth in recent years.

If the insurance industry continues to grow and the capital markets remain stable, then Berkshire Hathaway’s stock is likely to continue to rise. From my point of view, Berkshire Hathaway is an ideal value investment for long-term oriented investors. In 2023, the stock made a profit of around 14%. For those who want to make short-term money, they may remember the last article about Rockefeller methods and the use of factor certificates.

We bought Berkshire with a profit leverage of 2 on October 27, 2022 and sold it with a profit of 27% on August 17, 2023. On October 19, 2023, we then shifted to the bank that Warren Buffett values most: Bank of America. We multiplied this stock by a profit leverage of 3. The result: currently more than 60% in the plus. This clearly shows that stocks should remain the basis for every portfolio, but factor certificates can often achieve targeted performance peaks. The right mix in the investment strategy is the key to success.