Prediction: Owning Berkshire Hathaway Stock Will Not Be the Same After Warren Buffett Steps Down

Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A) has been a tremendous investment since the stock went public back in 1980. During that span, the insurance-led conglomerate has had only one chief executive officer: Warren Buffett. Buffett would prove himself to be one of the greatest investors of all time during his tenure at Berkshire.

However, Buffett shocked shareholders when he announced at the company's annual shareholder meeting that he would step down from the CEO role at the end of the year. Taking his place will be Greg Abel, his long-appointed successor and current head of Berkshire's energy division. Buffett will, however, stay on as a member of Berkshire's board.

Unlike Buffett, Abel is not a renowned investor. Instead, his strength lies in his operating expertise and being a shrewd dealmaker. He made a string of acquisitions to help turn a sleepy Iowa utility into a major power production and pipeline company that is now called Berkshire Hathaway Energy. Meanwhile, he has been running Berkshire's non-insurance businesses since 2018.

However, Abel will not be running Berkshire's huge investment portfolio. That job will fall to Todd Combs and Ted Weschler, whom Buffett brought on to help run that side of the business several years ago. Ajit Jain, meanwhile, will continue to run the day-to-day business of Berkshire's insurance operations.

A lot of cash and a new CEO

Buffett will leave his CEO role at Berkshire, leaving behind an unmatched legacy. He created a unique model for the insurance industry where he eschewed investing Berkshire's insurance float in safe, fixed-income investments, instead investing it in stocks. Float is the money that insurance companies collect in premiums and hold until a claim is paid out.

This decision, combined with Buffett's investment acumen, has created an enormous amount of shareholder value over the years. Buffett has a long-term investment focus, and he would buy stakes in companies he believed were undervalued that have the ability to keep compounding for decades. One of his most famous investments is Coca-Cola, which Berkshire began buying in 1988 and still holds today.

Buffett also leaves Abel and Berkshire Hathaway with a tremendous stockpile of cash. Buffett began selling stocks last year ahead of the market sell-off, while also ending the company's buyback program. Together with increased operating profits, Berkshire ended the first quarter with a whopping $347.7 billion in cash on its balance sheet.

Despite the recent market volatility, Buffett also didn't seem eager to run out to buy stocks ahead of stepping down as CEO. He told investors that Berkshire will eventually find places to invest its cash, but that "it's very unlikely to happen tomorrow." However, he noted that it would likely find someplace to invest in the next five years. He has shrugged off the recent market downturn, saying it hasn't been a dramatic bear market.

Unless a great investment comes along in the next eight months, it looks like Abel will have a large cash hoard when he steps in as CEO. How he allocates that money will be interesting, but it likely will be different than if Buffett were CEO. After all, Buffett is a stock picker, and Abel is an operator.

Instead of investing in stocks, I would expect Abel to be on the lookout to buy entire businesses. I wouldn't be surprised if he sold some Berkshire businesses, as well. The conglomerate has nearly 200 disparate businesses, ranging from railroads to ice cream parlors. Buffett collected a lot of undervalued businesses with little to no synergies, while at MidAmerican Energy, Abel went out and made synergistic acquisitions that positioned the company to be one of the largest utility companies in the U.S.

This strategy shift would not be a bad thing, but it would certainly be much different than how Berkshire was run in the past.

Image source: Getty Images.

Is Berkshire stock a buy?

Buffett is also leaving Berkshire with a pretty high stock valuation. The stock currently has a price-to-book (P/B) ratio of 1.7, which is one of the highest levels during the past decade. Buffett even stopped buying back Berkshire stock mid-year last year due to its high valuation.

BRK.B Price to Book Value data by YCharts.

When Buffett is no longer CEO, there's also a good chance that the Buffett premium in the stock will start to wane. In the past, Buffett would only buy back stock when it traded at a P/B below 1.2 times, so if the stock were to return to about this level, it could have some meaningful downside from current levels.

With Buffett appearing unlikely to use his cash stockpile anytime soon and a potential shift in its overall investment strategy (more toward buying operating businesses than stocks), my prediction is that this won't be the same Berkshire Hathaway stock in the years to come.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.