Rolfe: Berkshire Still Better Bet Than Small Caps

David Rolfe, chief investment officer of Wedgewood Partners, recently provided an update on a 10-year market bet he made with Marketwatch columnist Nicholas Vardy about two years ago.

The bet was that, over a 10-year stretch starting last March, Berkshire Hathaway Inc. (NYSE: BRK-B)’s stock would outperform the Vanguard Russell 2000 ETF (BMV: VTWO).

After two years, Berkshire’s shares are up about 18.0 percent, while the Russell 2000 ETF is down 8.0 percent.

Looking ahead to the next year, Rolfe predicts that Berkshire will continue to widen its performance gap over small-cap stocks. He sees long-term growth and valuation advantage for Berkshire and its holdings. This advantage makes the stock a favorable long-term investment to small caps in either an up or down market.

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“I’m not clever enough to figure out if Corporate America is [in] an 'earnings recession,' but if I was a betting man and had to take the over or under on the prospect for robust earnings growth over the next 12 months, I would take the under,” Rolfe wrote.

Rolfe pointed out that Berkshire currently trades at only 1.3x book value and that Warren Buffett himself has repeatedly expressed his desire to buy back shares of the company at 1.2x book value. That buying could mean some major support for the stock in the $125 level if the market deteriorates further in the near future.

Disclosure: The author holds no position in the stocks mentioned.