Just yesterday, Warren Buffett’s latest trades were revealed via Berkshire Hathaway Inc.’s (BRK.B) 13F filing, which is a filing that gives us information on all of the transactions that took place over the fourth quarter of 2015 — the quarter ending December 31 — in the stock portfolio managed by the legendary investor.
This filing can provide some valuable insight into where Warren Buffett thinks the best investments might lie.
Now, it might not make sense to piggyback on his trades and simply buy and/or sell whatever he has because these filings are generally released 45 days after the most recent quarter ended, but it would appear to be an intelligent move to investigate exactly where the most successful investor of all time is (and isn’t) putting his capital to work.
It’s also important to note that Buffett allows two other executives – Todd Combs and Ted Weschler – to authorize smaller transactions, so it’s difficult sometimes to decipher who bought and/or sold what.
Below, I’m going to go over every transaction and give some quick thoughts on each respective company.
I’m going to do my best to infer what each purchase and sale means, but it’s obviously impossible to know exactly what Warren Buffett or his lieutenants were thinking when each transaction was executed.
Let’s take a look!
Please keep in mind this list is for informational purposes only, and is not a recommendation to buy any specific stocks.
Purchased 9,411,911 shares of Wells Fargo & Co. (WFC)
Purchased 587,011 shares of Liberty Global PLC (LBTYA)
Purchased 26,533,525 shares of Kinder Morgan, Inc. (KMI) – NEW POSITION
Purchased 5,832,040 shares of Deere & Company (DE)
Purchased 124,526 shares of Axalta Coatings Systems Ltd. (AXTA)
Sold 227,974 shares of WABCO Holdings Inc. (WBC)
Sold 1,983,190 shares of Chicago Bridge & Iron Company N.V. (CBI) – SOLD OUT
Sold 12,743,618 shares of AT&T Inc. (T)
First, I’ll note a major change to Berkshire’s portfolio that didn’t actually occur in the fourth quarter of 2015. Due to the size of these transactions, I’m confident that Buffett was behind the moves.
Starting in early January 2016, Berkshire started aggressively adding to its position in Phillips 66 (PSX). The sum of these numerous transactions means that Berkshire has added 14,063,909 shares of the independent refiner and chemicals company so far in Q1 2016. Berkshire now owns 75,550,745 shares worth just under $6 billion, making Phillips 66 the sixth-largest position in the common stock portfolio.
This obviously means that Buffett is a big fan of this company. And I can see why.
As I noted in the previous update, the company is well positioned for the foreseeable future. While the oil & gas industry has seen extreme turmoil lately, Phillips 66 continues to makes gobs of money due to the fact that they have no upstream operations. Rather, they have significant refining, chemicals, and midstream operations, which makes their results (and stock) less volatile.
While many stocks in the Energy sector are down substantially over the last year, this stock is roughly flat. Meanwhile, the stock pays a healthy dividend of 2.86%. And they continue to increase their dividend regularly.
The P/E ratio is only 9.13 right now, making the stock very cheap. However, earnings per share are at an all-time high right now due to great margins. If anything there changes, the valuation could appear more expensive. Nonetheless, the company is diversified and continues to pump out (pun not intended) great results.
This appears to be a great long-term investment here. I remain very long and very happy right alongside Buffett and Berkshire.
Wells Fargo & Co. (WFC) – Purchased 9,411,911 shares.
This transaction brings Berkshire’s stake in Wells Fargo up to 479,704,270 shares, an increase of 2%.
Wells Fargo & Co. is one of the four largest banks in the US, with diversified financial offerings across retail, commercial, and corporate banking services.
The banking juggernaut remains one of the largest positions in the Berkshire portfolio. Berkshire owns more than $23 billion worth of the bank’s common stock, good enough for more than 9% of Wells Fargo’s entire float. Berkshire is by far Wells Fargo’s largest shareholder.
There should be no doubt that Buffett is behind this transaction, based on the size of the position we’re talking about. Although Buffett could have acquired the 9.4 million shares a little cheaper after the turn of the year, this bank is one of the best businesses in the US.
Results over the last five years have been tremendous – net income has almost doubled while its profitability metrics remain at or near the very top of the industry.
And with more than $1 trillion in deposits, the bank stands to benefit considerably from rising interest rates, which are already under way. This extremely low-cost source of capital allows the bank to take on opportunities that most other institutions could only dream of.
The P/E ratio is sitting at 11.62 right now. I think the bank is attractively valued right now, and cheaper than anything that was offered last quarter. I remain a very happy and loyal shareholder, although with a position much smaller than Berkshire’s.
Liberty Global PLC (LBTYA) – Purchased Purchased 587,011 shares.
Berkshire now owns 12,544,296 shares of Liberty Global. That’s an increase of 4.9% over the prior quarter.
Liberty Global PLC, through its subsidiaries, provides various media and telecommunications services, such as video, broadband internet, fixed-line telephone, and mobile telephone services.
I’ve been covering Berkshire’s trades for a while now, and one theme I’ve seen come up time and time again is a preference for companies in the media space.
Well, few are bigger or broader than the combined entities that make up the Liberty empire built by media magnate John Malone.
Liberty is the largest international cable company and one of the largest broadband internet providers in the world.
It’s an interesting position because this industry is extremely competitive. And changing dynamics mean more people move away from a traditional cable/bundle model and toward streaming options. However, while content delivery may change, consumers still need internet access to stream, and Liberty has that angle covered.
That said, Liberty has a somewhat significant amount of debt. That’s because the business model is is capital intensive, requiring lots of infrastructure to be built out.
Liberty appears to be aware of the changes afoot, which could mean consolidation. For instance, they recently agreed to combine Dutch businesses with rival Vodafone Group PLC (VOD).
One interesting point about this business is that it routinely reports negative GAAP net income. However, cash flow appears to be healthy. Looking at the valuation, the shares appear neither particularly expensive or cheap, but Berkshire obviously continues to see what they like here, with regular purchases of this stock on an almost quarterly basis.
Kinder Morgan, Inc. (KMI) – Purchased 26,533,525 shares.
This is a new position for Berkshire’s common stock portfolio.
Kinder Morgan, Inc. is the largest midstream energy company in North America, operating more than 80,000 miles of pipeline and 180 terminals.
This may surprise some people due to the fact that Kinder Morgan’s stock has absolutely collapsed over the last six months – it’s down 54% over that period.
Taking on more debt to increase its stake in ailing Natural Gas Pipeline Company of America, Kinder Morgan was subsequently threatened with a credit downgrade by credit rating issuer Moody’s Corporation (MCO).
Although Kinder Morgan is no longer technically a master limited partnership after consolidating its various units in 2014, they still rely heavily on debt and equity to fund growth.
Since their cost of capital would be seriously and potentially catastrophically damaged by a combination of a credit rating downgrade (the company operates with more than $40 billion in long-term debt) and its stock tanking, the company capitulated by cutting its dividend in order to internally fund growth, causing Moody’s to relent.
Well, Buffett has said before that he likes companies when they’re on the operating table. Kinder Morgan doesn’t appear to be too far off from that, albeit still breathing and healthy with $4.7 billion in distributable cash flow expected for this fiscal year. That said, the transaction size and the relatively small size of this position (relative to Berkshire’s portfolio) makes me believe that either Combs or Weschler was behind this move.
If being greedy when others are fearful is Buffett’s modus operandi, this is a shining example. While the market has punished this stock handily, the facts are that their pipelines are still operating, gas is still flowing, and the cash flow is still there. This isn’t an unhealthy business; they simply pushed the issue too far and they were called on it. Absent Moody’s threat, I don’t think the dividend would have been cut. But I think it was a jolt the company needed to slow down on the debt and take a more prudent approach.
Although a lot of long-term dividend growth investors completely sold out of KMI on the news of the dividend cut, I’ve held on to substantially all of my somewhat large position because I believe this company will be just fine over the long run. It looks like Berkshire shares that view.
This is a high-risk, high-reward play, in my opinion. But I think the upside potential is significant. And the stock is paying a juicy 3.20% yield even after the cut.
Deere & Company (DE) – Purchased 5,832,040 shares.
This brings Berkshire’s stake in Deere up to 22,884,150 shares.
This position has been increased by 34%.
Deere & Company manufactures machinery used in agricultural, construction, and forestry applications.
But Berkshire has been quietly building a sizable stake in the iconic agricultural machinery producer.
Their position is now worth just over $1.8 billion, big enough to mean that Berkshire is Deere’s second-largest shareholder behind Cascade Investment LLC, which is the investment firm that manages Bill Gates’ money. Gates is a good friend of Buffett’s, and they’re both obviously keen on this company.
It’s not difficult to understand why.
Although the agricultural industry has been hit hard lately, affecting Deere’s sales, Deere has put out some really stellar numbers over the last decade. Revenue and net income are up handsomely (even after factoring in the recent troubles), the outstanding share count is down significantly, free cash flow remains robust, and profitability metrics are great.
Moreover, the stock offers a yield just over 3%. And the stock appears attractively valued right now with a P/E ratio below 14 on depressed earnings. I’m personally also a big fan of Deere, being a fellow shareholder.
Axalta Coatings Systems Ltd. (AXTA) – Purchased 124,526 shares.
This moves Berkshire’s stake in Axalta up to 23,324,000 shares, which is a 0.5% increase over last quarter.
Axalta Coating Systems Ltd. manufactures, markets, and distributes coatings systems that primarily serve the automotive industry.
Berkshire clearly believes in this company; they’re the second-largest shareholder behind The Carlyle Group LP (CG), who itself bought Axalta directly from E. I. Dupont De Nemours And Co. (DD) in 2013. Originally a private transaction, Carlyle took the company public through an IPO in November 2014, but they still retain ownership of more than 30% of the company.
Berkshire has been aggressive lately in regards to increasing its exposure to the automotive industry. Between buying stakes in major auto manufacturers, car dealerships, and coating companies, Berkshire is strongly positioning itself here.
It’s tough to tell where Axalta is going because it’s been a public entity for such a short period of time. However, they have corporate history dating back almost 150 years.
Their results after The Carlyle Group took them public have thus far been a bit lumpy, but Berkshire clearly sees something they like in this business. This is an interesting stock to keep an eye on.
WABCO Holdings Inc. (WBC) – Sold 227,974 shares.
This transaction reduces Berkshire’s stake down to 3,331,215 shares, which is a reduction of 6.4%.
WABCO Holdings Inc. and its subsidiaries is engaged in the manufacture, marketing, and sale of electronic, mechanical, and mechatronic products for the commercial truck, trailer, bus, and passenger car manufacturers.
Berkshire has been systematically reducing its stake in WABCO for some time now. Notably, the systematic nature is smart; WABCO is a fairly small company – the market cap is less than $5.5 billion.
It’s somewhat strange that Berkshire continues to sell off the position. I say that because WABCO has actually put up really solid results over the last decade.
The company’s earnings per share have more than doubled, and revenue is up handily. The fundamentals are solid across the board. And they sport a fantastic balance sheet.
The sales could be to raise capital for better/other ideas. Or it could be a valuation call. Some of the basic valuation metrics are well above their five-year averages, indicating the stock is far from cheap right now. My bet is that Berkshire’s rationale is rooted in a combination of the two.
Chicago Bridge & Iron Company N.V. (CBI) – Sold 1,983,190 shares.
Berkshire sold out of this position completely.
Chicago Bridge & Iron Company N.V. is an energy infrastructure company, providing design, engineering, and construction services to clients in the energy, petrochemical, and natural resource companies.
Berkshire had been systematically selling off its stake in Chicago Bridge & Iron for a couple quarters in a row, and this transaction completes what was likely set in motion some time ago.
I’ve noted before that this position is interesting in that Berkshire was buying this stock back in 2014 at much higher prices. In fact, the stock is down some 60% from all-time highs achieved in early 2014. Obviously, Berkshire isn’t known to buy high and sell low, but that’s apparently what’s happened here. That said, the stock is down some 15% YTD, so it’s good that Berkshire got out when they did (if they were going to get out).
The company has faced a multitude of issues.
Primarily, the Energy industry, a major industry for Chicago Bridge & Iron, has been in turmoil. In addition, the company has faced cost overruns on a major project, which could potentially lead to legal problems. They also recently divested their nuclear business.
However, the company has been fundamentally excellent over the last decade. Both top-line and bottom-line growth are mighty impressive, although more recent results have been much weaker due to the aforementioned problems.
Chicago Bridge & Iron is guiding for its EPS to land between $5.00 and $5.50 this fiscal year, which would imply the stock is very cheap right now. Indeed, the stock goes for just 0.3 times TTM sales. And the price-to-book ratio is about half its five-year average.
That said, Berkshire clearly isn’t interested in the value. The yield isn’t enough to entice me, but I think this could be a strong value/turnaround play for an enterprising investor.
AT&T Inc. (T) – Sold 12,743,618 shares.
This sale reduced Berkshire’s position down to 46,577,138 shares, which is a 21.5% reduction from last quarter.
AT&T Inc. is the second-largest wireless carrier in the US, supporting over 130 million wireless phone connections, approximately 16 million high-speed internet connections, and more than 45 million video connections.
I don’t find this sale surprising. In fact, I wouldn’t be surprised if Berkshire slowly sells off its stake in the telecommunications giant for the next year or so.
While I like the stock – I’m a shareholder – I’m not sure it fits Berkshire’s portfolio.
AT&T operates in a very mature and competitive industry. They also have a significant amount of debt. Furthermore, I find it unlikely they’re going to grow much faster in the future than they have in the past, which is to say they aren’t going to surprise anyone with huge growth from one year to the next.
Buffett loves his dividend stocks (as evidenced by looking at Berkshire’s portfolio), but Buffett didn’t buy directly into AT&T.
Berkshire ended up with its AT&T stake after AT&T acquired DIRECTV, a large position for Berkshire. Seeing as how Berkshire is almost immediately disposing of its sizable stake, I find it unlikely they’ll hold the stock.
But I’m personally a fan of the company. The acquisition of DIRECTV gives AT&T more exposure to fast-growing Latin American markets, where pay TV is still very popular. Moreover, the company now has additional possibilities for bundles and cross-promotion. In an industry where every competitive advantage should be cherished, AT&T seems to have an edge.
The stock yields 5.24%, and AT&T has increased its dividend for more than 30 consecutive years. Management predicts that free cash flow will continue to soar after DIRECTV is fully integrated, meaning that big dividend should remain sustainable for years to come.
All in all, I think this stock is a “must-own stock” for long-term dividend growth investors. But it’s obviously not the same for Buffett and Berkshire.
— Jason Fieber
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