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David Rolfe: Why Buffett's Big-Cap Berkshire Hathaway Will Outperform Small-Cap Stocks

Why Buffett’s Big-Cap Berkshire Hathaway Will Outperform Small-Cap Stocks by David Rolfe, Market Watch

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Berkshire Hathaway's stock continues its winning ways over the small-cap Russell 2000 Index. I should quit my annual share price forecasts while I’m ahead — but I won’t.

Let’s recap the past 12 months in my 10-year derby bet with Marketwatch columnist Nicholas Vardy. The competition pits Berkshire Hathaway  against small-cap stocks as measured by the Vanguard Russell 2000 ETF ((VTWO), here’s what I predicted in early March 2015: “The coming year will likely see stronger headwinds for Berkshire shares. In fact, I would not be surprised if the shares’ performance turns out to be little more than flat over the next 12 months.”

There was also the definitive, “My prediction: Berkshire Hathaway beats the Russell 2000 at the wire — by a nose.”

Well. In the 12 months through March 3, Berkshire Hathaway’s Class B shares (BRKB) lost about 6%. As recently as Dec. 16, BRKB was neck-and-neck with VTWO as the stocks rounded the clubhouse turn. At the finish on March 3, BRKB thundered ahead and prevailed by quite a bit: down 6.2% compared to a 12.6% slide for VTWO.

And with two years now in the books of our 10-year bet, BRKB has gained 18.0%, while the VTWO has declined 8.0%. BRKB now sports an imposing lead of 26 percentage points.

But what about the next 12 months? My prediction is that Berkshire will continue its growth advantage and valuation advantage over small-cap stocks.

On the growth front, I expect an earnings headwind for most of Corporate America. The Leuthold Group recently reported that based on the latest results of their 4,000-company Earnings Breadth Indicator, just 53.7% of the indicator’s companies posted year-over-year earnings gains. Furthermore, Leuthold noted (direly) that the last three times their EBI measure crossed that level on the downside occurred during the recessions of February 1991, October 2001, and July 2008.

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David Rolfe: Why Buffett's Big-Cap Berkshire Hathaway Will Outperform Small-Cap Stocks

Berkshire Hathaway

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