Warren Buffett’s latest trades were just revealed via the most recent Berkshire Hathaway Inc. (BRK.B) 13F filing, which is a filing that gives us information on all of the transactions that took place over the second quarter of 2017 — the quarter ending June 30 — 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.

Purchases
Purchased 834,854 shares of Apple Inc. (AAPL)
Purchased 17,217,529 shares of Bank of New York Mellon Corp. (BK)
Purchased 10,000,000 shares of General Motors Company (GM)
Purchased 8,783,876 shares of Liberty Sirius XM Group (LSXMK)
Purchased 4,612,560 shares of Liberty Sirius XM Group (LSXMA)
Purchased 18,621,674 shares of Store Capital Corp. (STOR) – NEW POSITION
Purchased 17,463,000 shares of Synchrony Financial (SYF) – NEW POSITION

Sales
Sold 10,585,502 shares of General Electric Company (GE) – SOLD OUT
Sold 2,278,854 shares of American Airlines Group Inc. (AAL)
Sold 1,915,600 shares of Delta Air Lines, Inc. (DAL)
Sold 10,477,282 shares of International Business Machines Corp. (IBM)
Sold 34,409,624 shares of Sirius XM Holdings Inc. (SIRI)
Sold 739,790 shares of United Continental Holdings Inc. (UAL)
Sold 2,845,359 shares of WABCO Holdings Inc. (WBC)
Sold 11,717,000 shares of Wells Fargo & Co. (WFC)

Purchases
Apple Inc. (AAPL) – Purchased 834,854 shares.

This purchase increased Berkshire’s stake in Apple by 0.6%. The position in Apple is now at 130,191,960 shares.

Apple Inc. designs, manufactures, and markets a variety of consumer electronics, including smartphones, tablets, personal computers, smartwatches, and portable music players. They’re vertically integrated with software and hardware. They also offer a variety of services designed to be used on and for their products.

This was a relatively minor bump in the Apple position, as Berkshire owns such a substantial stake that the 835,000 shares is more or less a drop in the bucket for them.

That said, this is further evidence that Buffett continues to believe in Apple’s deft ability to combine software, hardware, and an ecosystem together into products that capture consumers’ imaginations and retain their loyalty.

As Buffett has stated before about the sizable stake in Apple – it’s a stake that’s worth north of $20 billion at today’s stock price – he believes that it should be thought of more as a consumer products company, rather than a technology company. Indeed, they basically use technology to manufacture, market, and sell consumer products that have practically become ubiquitous in our society.

While Apple’s sheer size – the company’s market cap is ~$825 billion – would indicate that future growth potential is likely limited due to the law of large numbers, Apple has demonstrated an ability to defy gravity.

The company is generating over $45 billion annually in net income, off of over $200 billion in annual revenue. Net margin is over 20%, ROE is over 35%, and ROIC is well into the double digits.

Meanwhile, the company pays a very attractive dividend, with the stock currently offering a yield of 1.58%. More importantly, they continue to grow the dividend at a healthy rate that’s well in excess of inflation. The dividend seems likely to continue growing for the foreseeable future and beyond, providing Berkshire with a massive stream of growing passive income. We’re talking over $82 million per quarter, at the current dividend rate.

The valuation seems to have caught up to the stock at this time, with the stock up 38% YTD. That said, I see no reason why this shouldn’t be a great long-term investment.

Bank of New York Mellon Corp. (BK) – Purchased 17,217,529 shares.

This transaction boosted Berkshire’s stake in the bank by 52%, with Berkshire now owning 50,229,588 shares.

Bank of New York Mellon Corp. is a global financial services company, providing investment management and investment services.

Berkshire’s in-and-out movements with this particular stock kind of baffle me. I’ve been tracking Berkshire’s quarterly portfolio changes for a while now, and I’ve noticed that Berkshire will sell this stock for a quarter or two in a row, only to buy back shares over the course of the following quarter or two.

Regardless, Buffett has long been a noted fan of the banking business model. With Bank of New York Mellon’s scale at the global level, Buffett likely appreciates that scale.

This bank’s long-term fundamental picture isn’t outstanding, but it’s not particularly bad either. Both revenue and profit are up modestly for the last fiscal year compared to a decade ago, while the overall profitability is okay.

The valuation doesn’t appear to indicate significant undervaluation, but the stock also doesn’t appear to be overvalued. The current P/E ratio is closing in on 16, which is close to the stock’s five-year average. However, the price-to-book ratio is currently elevated relative to its five-year average. The stock’s yield is right in line with its recent historical average.

Overall, it appears to be an OK bank with OK fundamentals and an OK 10-year stock chart. Nothing phenomenal, but one also can’t really argue against owning shares here.

General Motors Company (GM) – Purchased 10,000,000 shares.

Berkshire now owns 60,000,000 shares of GM, which is an increase of 20% over last quarter.

General Motors Company designs, manufactures, and sells cars, trucks, and automobile parts globally.

This is one of the largest manufacturers of vehicles in the world, and the quality of those vehicles appears to be as high as ever. While the company has certainly had its troubles in the past, leading to the declaration of bankruptcy in the summer of 2009, operations have been strong over the last five or so years.

The problem with auto manufacturers is that they’re not just cyclical businesses, but that even the good times can be tough to eke out a sizable profit due to high fixed costs and the constant need for R&D and new products.

But some of those concerns might be priced into the stock. While a P/E ratio of under 6 isn’t relevant, most of the basic valuation metrics still indicate the potential for substantial undervaluation, if GM can manage the cycles and its costs properly.

Meanwhile, the stock offers a very high yield of 4.29% right now. That’s a lot of income in a world where interest rates are as low as they are.

Overall, GM appears to be a value stock that offers a great yield. We’re right in Buffett’s wheelhouse here. It just remains to be seen how well GM manages operations under its new structure, especially with concerns that global auto sales may be slowing.

Liberty Sirius XM Group (LSXMK) – Purchased 8,783,876 shares.
Liberty Sirius XM Group (LSXMA)- Purchased 4,612,560 shares.

These purchases bring Berkshire’s stake up to 31,090,985 shares for the class C shares and 4,612,560 for the class A shares.

Liberty Media Corp. is a media, communications, and entertainment company.

Berkshire routinely adds and trims to its various Liberty and related holdings. I’ve discussed these moves ad nauseam in prior updates, so I won’t go over each individual transaction. But you can track these moves via the Buffett Tracker, which is linked to at the outset of the article.

Store Capital Corp. (STOR) – Purchased 18,621,674 shares.

This is a new position for Berkshire Hathaway.

Store Capital Corp. is a real estate investment trust that is engaged in the acquisition, investment, and management of single tenant operational real estate.

Real estate investment trusts that focus on triple-net leasing single tenant properties can be fantastic long-term investments, so it should be no surprise that Berkshire took a relatively large stake in Store Capital. The only surprise might be that Berkshire doesn’t have more exposure in this space.

Store Capital has only been public for a few years, so it’s hard to glean much from their operational results over the last few years. But what has been produced by the company is so far fairly impressive.

Revenue doubled between FY 2014 and FY 2016. And adjusted funds from operations for the first six months of 2017 is up 27.4% YOY, which is really just incredible. This REIT has a market cap of under $5 billion (1,770 properties), indicating plenty of growth runway.

Plus, the stock offers a very appealing yield of 4.79%. And that dividend is steadily growing.

Although the stock is up somewhat substantially after it was announced that Berkshire took a stake, the valuation still looks attractive. The midpoint of 2017 AFFO is $1.70. That’s a forward-looking P/AFFO ratio of just over 14, a solid discount to some of the larger players in this field. There’s a lot to like here.

Synchrony Financial (SYF) – Purchased 17,463,000 shares.

This is a new position for Berkshire Hathaway.

Synchrony Financial is a financial services company that offers a range of credit products through partnerships with retailers and service providers.

Synchrony Financial was spun off from General Electric in late 2015 while GE was busy shedding its legacy financial and lending assets in favor of focusing on core industrial businesses.

It might seem interesting that Berkshire took a position in the company, but it actually fits right in line with the rest of the portfolio. Buffett invested big in American Express Company (AXP) many years ago, which is analogous. And Berkshire has since expanded its exposure to payments, with positions in Visa Inc. (V) and Mastercard Inc. (MA).

Since Synchrony was spun off, operations have been solid. The top line has grown nicely, although margin compression has affected bottom-line results. Profitability is right in line with the industry.

The valuation seems reasonable here. The P/E ratio, just above 11, is right about what you’d expect. And the yield, at 2.02%, is also competitive. It’s a solid stock trading for a solid valuation.

Sales
General Electric Company (GE) – Sold 10,585,502 shares.

Berkshire Hathaway completely sold out of this position.

General Electric Company is a global digital industrial company that operates various industrial, healthcare, aviation, energy, and related financing businesses.

Speaking of General Electric, it looks like Berkshire prefers the spin-off over the main company in this case.

While General Electric’s business portfolio is positioned well for the long haul, the shuffling of the company’s various businesses and the results thus far have been disappointing. The company hasn’t hit some of its targets. And the selling of financial assets could have been a bit more selective and a little less prodigious, in hindsight.

As a result of continuing disappointment, the CEO, Jeff Immelt, has moved on. With a great portfolio of businesses, a ton of potential, and a new captain at the helm, there’s actually a lot to be excited about for GE.

But Berkshire acquired these GE shares via a complicated deal that saw Buffett invest $3 billion in GE during the height of the financial crisis, which also came with warrants that could be converted into common stock later. The deal was later amended, and Berkshire essentially received these ~10.5 million shares at no expense. So it’s essentially all profit for Berkshire. And with the stake being so small and GE’s future still somewhat up in the air, it makes sense for Berkshire to just move on.

That all said, there’s still a lot to like for long-term investors here.

The stock appears to be undervalued, even if GE can perform only modestly moving forward. And the stock yields 3.8% right now, which is well in excess of the broader market. If the new CEO can move things in the right direction, a valuation expansion could provide upside on top of whatever gain comes from normal operations and operational improvement.

American Airlines Group Inc. (AAL) – Sold 2,278,854 shares.

This sale reduced Berkshire’s stake down to 47,000,000 shares, which is a 5% reduction over last quarter.

American Airlines Group Inc. is a holding company that, through its subsidiaries, operates as an airline carrier.

This sale is interesting, as Berkshire just added to its AAL stake last quarter.

Berkshire started aggressively investing in the domestic airlines late last year. And the stocks, as a group, have performed phenomenally since then, likely at least partly due to Berkshire’s investments.

But it appears that Berkshire is lightening up on this industry in general, as there were multiple sales of shares in airlines this quarter (noted below).

One wonders if this is a valuation call, since these stocks went from very undervalued to less so in a relatively short period of time – this stock is almost 40% over the last year.

Of course, Buffett has long been unenthusiastic about the idea of investing in airlines (high fixed costs, extremely competitive industry, limited pricing power, heavily cyclical, etc.), so perhaps Berkshire is just booking some nice profit here and seeing how things perform from there.

But the stock doesn’t appear to be overvalued here.

So if you liked this company (or airlines in general) a few months ago, I’m not sure why you’d change your mind today. However, Berkshire has a rather large chunk of capital committed to the industry, so lightening up a bit after a big run doesn’t strike me as a crazy idea.

Delta Air Lines, Inc. (DAL) – Sold 1,915,600 shares.

This transaction reduced Berkshire’s stake by over 3%, now down to 53,110,395 shares.

Delta Air Lines, Inc. provides airline transportation services for passengers and cargo globally.

Much of what I just said about American Airlines could be said about Delta Air Lines. The stock is up over 37% over the last year, and Berkshire has no doubt found itself sitting on a nice profit in a pretty short period of time.

With almost $10 billion invested in airlines at the start of the last quarter, Berkshire is actually somewhat heavily exposed to the airline industry. We’re talking almost 6% of the portfolio. That’s not insignificant.

But it’s also important to keep in mind that these sales are rather small. These are just minor reductions in the size of these positions, so I don’t think one can draw any major conclusions here.

Again, if you liked airline stocks a few months ago, there doesn’t appear to be anything that would indicate things have changed much since then.

International Business Machines Corp. (IBM) – Sold 10,477,282 shares.

This sale drops Berkshire’s stake in IBM down to 54,084,673 shares, which is a 16% reduction from last quarter.

International Business Machines Corp. is an information technology company, providing technology-driven solutions to customers globally.

This is the second quarter in a row in which Berkshire has severely lightened up on its investment in IBM.

Buffett noted not too long ago that he “revalued” IBM’s business and stock, as its turnaround strategy has not been as successful as he once thought it would be. Although he didn’t specifically say so (not to my knowledge), it seems to me that Buffett believes IBM’s economic moat has thinned out over time, and the company is just not as competitive and dominant as it once was.

Overall, IBM has obviously not been a very successful investment for Berkshire. Buffett invested big on IBM a number of years ago, with the position at one time being one of the largest single investments in Berkshire’s common stock portfolio.

But the company’s fundamentals have deteriorated a bit over that time frame, and the stock has languished accordingly.

That said, the stock actually looks at least modestly undervalued to me here, with a P/E ratio that’s under 12. Even if IBM ekes out mid-single-digit growth moving forward, the investment could be pretty solid over the long run. Plus, IBM pays out a hefty dividend, with the stock yielding 4.22% right now. IBM isn’t the business it was five years ago, but the yield is over twice as high as it was five years ago. And the valuation isn’t as high as it was five years ago.

So a “revaluation” seems most appropriate to me, but Mr. Market has already done that for Mr. Buffett, in my view. Said another way, the stock is worth less, in terms of valuation, than it was when Buffett first bought the stock. But the market’s valuation on the stock is lower.

As a long-term dividend growth investor, I’m still a fan of IBM stock here. With that 4%+ yield and what’s sure to be inflation-beating dividend growth for years to come, you’re getting great income and income growth. But Berkshire is more interested in beating the market and generating an outsized return for their shareholders, and it’s tough to say that this stock will likely do that over the next five or so years.

United Continental Holdings Inc. (UAL) – Sold 739,790 shares.

Berkshire now owns 28,211,563 shares after this sale. That’s almost 3% less than last quarter.

United Continental Holdings Inc. is a holding company that, through its subsidiaries, is engaged in the transportation of people and cargo through its mainline operations.

So we clearly see a theme here where Berkshire has lightened up on its exposure to the airline industry in general, although Berkshire notably did not sell any of its shares in Southwest Airlines Co. (LUV) this quarter.

Again, it’s important to keep perspective. These are small sales. And with Buffett’s predisposition regarding airlines, I’m not surprised at all to see Berkshire just slightly moving away from the industry.

But Berkshire Hathaway still has a lot of exposure to the industry, and one’s investment thesis for a stock like this shouldn’t really be any different than it was three or six months ago.

WABCO Holdings Inc. (WBC) – Sold 2,845,359 shares.

Berkshire’s stake in this position dropped by approximately 98% as a result of this transaction, with Berkshire now owning 63,195 shares.

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.

This is another interesting sale. Berkshire was at one point systematically selling off the position, indicating that they’d eventually sell out. Then Berkshire purchased shares in the third quarter of 2016. Now it appears that they’re going to sell out completely very soon, as there’s almost nothing left of this investment after this sale.

WABCO is actually a pretty decent little company. The fundamentals are solid. And with a market cap of $7.5 billion, it’s right-sized for a Berkshire bolt-on acquisition.

But the growth isn’t quite secular. And the stock looks overvalued here. The stock is up almost 20% over just the last three months, so it looks like Berkshire used that performance to move almost completely out of the position.

Wells Fargo & Co. (WFC) – Sold 11,717,000 shares.

This sale dropped Berkshire’s stake in the position to 467,987,270 shares, which is a reduction of more than 2% over last quarter.

Wells Fargo & Co. is one of the four largest banks in the US, with diversified financial offerings across retail, commercial, and corporate banking services.

This sale is actually very simple and straightforward.

While some people might try to infer that this sale was somehow related (at least directly) to the recent scandals that have plagued the bank, the fact is that Buffett telegraphed this sale months ago.

Berkshire cannot own more than 10% of the bank due to regulations. Before this sale, they were going to exceed that mark.

When Wells Fargo buys back its stock, this organically increases Berkshire’s stake in the bank (even if Berkshire buy no more shares on their own). As Wells Fargo continues to reduce its float via buybacks, this will continue to bump Berkshire up toward that 10% ceiling. But this sale was somewhat sizable, so it should give Berkshire some breathing room for the time being. However, don’t be surprised if Berkshire has to sell off more stock in coming quarters.

—  Jason Fieber

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