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Berkshire Hits the Wall; Is It Still a Buy?

Berkshire Hathaway shares reach three new 52-week highs in the past two weeks, the latest on Friday. Is the Berkshire surge headed higher, or is the Warren Buffett stock poised for a pullback?

OMAHA, Neb. (


) --

Berkshire Hathaway

(BRK.B) - Get Berkshire Hathaway Inc. Class B Report

operating subsidiary


has been on a shaky flight path, but Berkshire's own stock continued to climb ever-higher last week, forcing investors to ask when the climb up by the Warren Buffett investment company would hit resistance.

Berkshire Hathaway ran into that resistance this week, as the unexpectedly high initial jobless claims on Thursday, and the continuing economic woes in the Euro nations led by Greece and Spain, pushed all equities down.

Thursday was a bad news day for Berkshire, in particular.

Berkshire Hathaway lost its last AAA credit rating on Thursday, and also revealed in an SEC filing that its operating subsidiaries had shed another 3,000 jobs in December.

Still, last week was a watershed week for Berkshire Hathaway, with Standard & Poor's finally ending the rampant speculation about Berkshire being added to the S&P 500 Index, confirming that the historic marriage of the U.S. flagship equity index and U.S. flagship capitalist would indeed occur.

Berkshire Hathaway has set new 52-week high share prices in its B shares four times in the past two weeks. The first time, the new trading high in the Berkshire Hathaway B shares was attained on Jan. 21, when Berkshire shares finally eclipsed the $70 mark, finishing Jan. 21 at $72.72.

The first 52-week high was triggered by the 50-to-1 stock split in Berkshire's B shares, a move made to help finance the upcoming acquisition of

Burlington Northern


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The 52-week high was no small feat, even for can-do-no-wrong-in-the-eyes-of-the-market Warren Buffett.

Consider this: Berkshire Hathaway shares hadn't broken through the $70 threshold, on an adjusted basis, since early August, when for a two-day period they traded above $70.

Now Berkshire Hathaway's B shares have finished above the $70 mark in the past six trading days, through the close on Thursday. The second 52-week high in the Berkshire Hathaway shares was achieved last Thursday, when the shares finished at $73.75.

On Friday, Berkshire Hathaway shares were again climbing higher, up more than 4.5% by mid-day Friday, to a price above $77 -- which was another 52-week high -- and as usual, Berkshire Hathaway shares were on pace to again set new high in trading volume.

The final 52-week high for Berkshire Hathaway was attained this Monday, when shares reached $78.

At the close on Thursday, Berkshire Hathaway B shares' trading volume was more than 11 million shares -- twice the average daily volume in shares traded that Berkshire has established in its first few weeks of new-found liquidity.

Last Wednesday -- S&P had announced late last Tuesday afternoon its decision to add Berkshire Hathaway to the S&P 500 -- just under

20 million shares of Berkshire Hathaway were traded .

Technical traders have indicated that the $70 price target that Berkshire has managed to stay above -- even as the market conditions worsened this week and excitement about the stock split and S&P inclusion waned -- could be an indication that Berkshire Hathaway is a good stock to go long on, at least in the near-term.

Still, how high can the Warren Buffett stock climb, given its exposure to the U.S. economy and all the uncertainty surrounding the cyclical stocks within the Berkshire portfolio?

On Monday,

Berkshire Hathaway experienced its first market resistance, with its shares falling 1.3%, even after attaining a new 52-week high.

What's more, in marked contrast to last week when Berkshire traded up on several days when the broad equity markets were down, on Monday Berkshire was the one losing ground while the broad equity indexes gained.

On Thursday, Berkshire was down along with the markets on the worst trading day in recent history, though Berkshire was down almost 1% less than the S&P 500 Index.

It is still important to note that from March lows, Berkshire still has 5% to make up until it is in equilibrium with S&P 500 gains.

If you talk to the Buffett faithful, they will tell you that Berkshire Hathaway shares are undervalued by as much as 30% to 40%.

In fact, the legions of Buffett fans will point to

the recent underperformance of Warren Buffett's investment company as the reason why now is the time to invest. Berkshire Hathaway significantly underperformed the S&P 500 in 2009.

For one, the insurance industry, which is a huge component of the Berkshire mix, has been a dog.

What's more, the big-cap U.S. companies that comprise Berkshire's publicly traded securities portfolio -- corporate elite stocks like


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Coca Cola

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American Express

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Wells Fargo

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-- were left in the dust in 2009 by the resurgent small-caps.

The operating subsidiaries that are wholly owned by Berkshire Hathaway, such as

Clayton Homes

, carpet company

Shaw Industries

and several jewelry companies, are all highly sensitive to U.S. housing and employment sectors, and consumer spending.

In the past two weeks, Warren Buffett also struck two big deals for his reinsurance business, making a significant increase of Berkshire Hathaway's stake in

Munich Reinsurance

, and buying a book of premium business from

Swiss Re


The Berkshire bulls say that it all points to a big resurgence in the value of Berkshire Hathaway shares, as the cyclically out-of-favor sectors that have led Buffett to outperform the S&P 500 by two-thirds in the past 15 years come back strong in the later stages of the economic recovery, and as Buffett can reinvest premium profits from his reinsurance business in higher-yielding assets.

That is, if the later stages of the economic recovery come sooner rather than later.

The past two weeks have demonstrated a growing level of uncertainty in the markets, and in particular towards the U.S. economy and the U.S. employment outlook, that does not necessarily inspire the "all-in wager on the U.S. economy" which Buffett has made.

Still, Berkshire Hathaway -- even with its U.S. economy-centric profile -- was trading like its own animal in the past week.

On several days when the markets were down, and uncertainty about the U.S. recovery and job growth sent U.S. indexes into declines,

Berkshire Hathaway shares kept going higher.

Last Friday reflected this disconnect between the U.S. market outlook and Berkshire's trading, with the big U.S. indexes close to flat on Friday while Berkshire continued its share price ascendence.

The feeding frenzy in Berkshire shares was given further bait late last Thursday when

Berkshire Hathaway announced that it would not issue any additional shares due to the S&P 500 inclusion. It is common for companies to do an "index add" of common shares after they have been added to the S&P 500.

Of course, some market watchers say that the recent surge is simply a reaction to the fact that every index fund in the world benchmarked to the S&P 500 will now have to add Berkshire Hathaway to its portfolio mix. However, since the S&P move was long anticipated -- and there have been several

academic studies indicating that stocks added to the S&P 500 get a big bump -- could the market have really completely missed this until after S&P made its announcement?

Is the surge in Berkshire Hathaway shares just the type of irrational exuberance, spurred by crowd psychology, that would irk a patient value investor like Warren Buffett. Or is the rise in Berkshire Hathaway's share price here to stay, maybe set to go still higher?

All of which begs the question: Are you a bull or a bear on Buffett's Berkshire? Take our poll below, to see what


has to say.

-- Reported by Eric Rosenbaum in New York.


>>Berkshire Hathaway: Best in Class

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