Warren Buffett' Berkshire Hathaway (BRK.A  ) is an iconic company, and it's delivered spectacular returns for shareholders. The company's success is primarily a testament to Buffett's ability to allocate capital efficiently. It's a bit of a flywheel in which Buffett uses his investing skills to generate money which he uses to buy businesses. Then, he used the cash flow from these businesses to either invest or buy more businesses.

Given Buffett's investing IQ, his moves are closely studied and anticipated by the market. Right now, he's giving a very clear indication that he believes that Berkshire is undervalued. So far, this year Buffett has been plowing money into buying back shares of Berkshire, and he doubled these efforts in Q3 to buy back $9 billion. In total, he's bought back $15.7 billion shares which is a bit more than 3% of the company.

Inside the Numbers

These efforts are bullish for the stock because they indicate that Buffett believes the best use of his capital is to reinvest it in Berkshire. Additionally, by lowering the share count, he is boosting EPS. Notably, many of Buffett's holdings including Apple (AAPL  ) have large share buyback programs in place which offer more tax advantages than dividends.

In Q3, Berkshire's net income from its operating companies was $5.5 billion which is a 30% drop from 2019. This isn't entirely surprising, since Berkshire's companies operate in sectors like financials, energy, insurance, and industrials which have seen their fortunes decline during the pandemic. However, trends are positive, and the vaccine news makes it more likely that these sectors will experience improvement and pent-up demand.

One bright spot for investors is that while operating income was down, investment income was up massively, largely due to gains in Buffett's holdings in Apple and Amazon (AMZN  ). Buffett's latest 13F filing shows that he has been deploying his large cash haul into pharmaceutical and healthcare stocks.

Stock Price Outlook

Although Berkshire has mildly underperformed due to its exposure to lagging sectors like energy and financials, there are several reasons for optimism beyond the share buybacks. The COVID vaccine seems like a precursor to a massive growth to value rotation which could result in outperformance for Berkshire. Shares have become quite cheap with a price to earnings ratio of 15 which doesn't include the expected economic improvements.

Following the earnings report, Berkshire's shares broke out to a new high. Given that growth should continue higher and interest rates will remain low, Berkshire's shares are likely to outperform in the next year.