Berkshire Hathaway Enters Oversold Territory On Weak Momentum (BRK)

Legendary investor Warren Buffett advises investors to be "fearful when others are greedy, and greedy when others are fearful." One way to gauge whether fear may be driving trading in a particular security is through a technical analysis indicator called the Relative Strength Index, or RSI, which measures the speed and magnitude of recent price changes on a scale of zero to 100. An RSI reading below 30 is commonly interpreted as suggesting that a security may be oversold, while a reading above 70 can suggest overbought conditions.

In trading on Friday, shares of Berkshire Hathaway CDR (CAD Hedged) (BRK.CA) entered into oversold territory, hitting an RSI reading of 26.6, after changing hands as low as $34.15 per share. By comparison, the current RSI reading of the S&P/TSX Composite Index is 42.0, indicating less downward momentum for the broader Canadian equity benchmark than for BRK.CA specifically. A bullish investor could look at BRK.CA's 26.6 RSI reading as a sign that the recent heavy selling pressure may be in the process of exhausting itself, and could begin to look for potential entry-point opportunities on the buy side, subject to their risk tolerance and investment horizon.

BRK.CA is a Canadian-listed Canadian Depositary Receipt (CDR) designed to provide investors with exposure to Berkshire Hathaway Inc.'s Class B shares, while incorporating a built-in currency hedge against movements in the U.S. dollar versus the Canadian dollar. CDRs allow Canadian investors to trade fractional, currency-hedged interests in large U.S. companies in Canadian dollars on the NEO Exchange, potentially improving accessibility and reducing the impact of foreign exchange fluctuations on returns. In the case of Berkshire Hathaway, the underlying business is a diversified conglomerate spanning insurance, energy, rail transportation, manufacturing, retail, and a sizeable portfolio of publicly traded equities.

The chart below shows the one-year performance of BRK.CA shares:

Looking at the chart above, BRK.CA's low point in its 52-week range is $34.11 per share, with $40.45 as the 52-week high point — that compares with a last trade of $34.26. Trading so close to its 52-week low, combined with an RSI below 30, underscores the degree of recent selling pressure in the name. It is important to note, however, that the RSI is a momentum indicator rather than a valuation tool: a security can remain oversold or overbought for extended periods, and price action can continue in the same direction despite an extreme RSI reading.

For investors considering BRK.CA, an oversold signal may warrant closer fundamental analysis of Berkshire Hathaway itself, including its diversified earnings base, insurance float, balance-sheet strength, and exposure to key sectors such as financials, energy, and consumer spending. Investors may also wish to compare the CDR structure and its currency-hedged profile with alternatives such as directly holding Berkshire Hathaway Class B shares in U.S. dollars, or using currency-hedged exchange-traded funds, to determine the most appropriate vehicle for their objectives.

As with any single-indicator approach, using RSI in isolation can be risky. Many portfolio managers prefer to combine momentum metrics such as RSI with other tools, including support and resistance levels, moving averages, volume trends, and company-specific news or earnings developments, before making allocation decisions.

Find out what 9 other oversold stocks you need to know about »

Use the signal as a starting point, then compare it with the stocks in 10 Oversold Canadian Stocks.