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 2018 — 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 12,388,244 shares of Apple Inc. (AAPL)
Purchased 940,000 shares of Axalta Coating Systems Ltd. (AXTA)
Purchased 2,608,928 shares of Bank of New York Mellon Corp. (BK)
Purchased 10,066,483 shares of Delta Air Lines Inc. (DAL)
Purchased 1,393,611 shares of General Motors Co. (GM)
Purchased 2,294,971 shares of Goldman Sachs Group Inc. (GS)
Purchased 1,584,592 shares of Liberty Global PLC Class A (LBTYA)
Purchased 8,887,943 shares of Southwest Airlines Co. (LUV)
Purchased 2,709,585 shares of Teva Pharmaceutical Industries Ltd. (TEVA)
Purchased 9,846,153 shares of US Bancorp (USB)

Sales

Sold 18,970,134 shares of Monsanto Co. (MON) – SOLD OUT
Sold 284,778 shares of Verisk Analytics, Inc. (VRSK) – SOLD OUT
Sold 1,300,000 shares of American Airlines Group Inc. (AAL)
Sold 718,688 shares of Charter Communications Inc. (CHTR)
Sold 10,960,378 shares of Phillips 66 (PSX)
Sold 1,021,421 shares of United Continental Holdings Inc. (UAL)
Sold 4,499,486 shares of Wells Fargo & Co. (WFC)

Purchases

Apple Inc. (AAPL) – Purchased 12,388,244 shares. 

This transaction increased Berkshire’s stake in Apple Inc. by 5.2%, with its position now up to 251,955,877 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 position has been obvious for a while now: Warren Buffett is squarely behind these moves.

This might be the headline portfolio move here, considering that Berkshire is adding to what’s by far the largest position in its portfolio.

For perspective on that, we’re talking almost $53 billion. This position is about 25% of Berkshire’s entire portfolio. For an investment that’s still relatively new for Berkshire (compared to how long they’ve been holding some of their investments), that’s notable.

All that said, it’s also not terribly surprising.

Berkshire’s size means they have to mostly invest large amounts of money at a time in order to move their dial, and there’s no bigger fish swimming in the ocean of capitalism than Apple (Apple very recently crossed over $1 trillion in market cap – the first company ever to do so).

Speaking about Apple specifically, there’s so much to like.

They have one of the most successful consumer products of all time in their iPhone, and the company has been successfully moving into sticky and highly-profitable services. Their brand has never been stronger than it is today, nor have their customers ever been more loyal to their one-of-a-kind ecosystem.

I argued a few months ago that this stock is worth something close to $204/share, so it’s not surprising to see Buffett continue to load up on one of the best businesses in the entire world at what appears to be a fair price.

Axalta Coating Systems Ltd. (AXTA) – Purchased 940,000 shares.

Berkshire increased its stake up to 24,264,000 shares, an increase of 4.0% over last quarter.

Axalta Coating Systems Ltd. manufactures, markets and distributes coating systems.

This is one of those classic “boring” businesses that Buffett loves – evidenced by the fact that Benjamin Moore & Co., a paint company, is a subsidiary of Berkshire Hathaway.

There’s nothing exciting about coatings, but there’s money to be made here.

Axalta has been increasing its free cash flow mightily in recent years, and fundamentals appear to be on the upswing.

The valuation is a bit tough to nail down because the company doesn’t have a lot of public history to go off of, but most basic valuation metrics are in line with (or under) industry averages.

Bank of New York Mellon Corp. (BK) – Purchased 2,608,928 shares.

Berkshire increased its stake by 4.2%, now up to 64,800,376 shares.

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

After some back and forth with this position over a rather lengthy period of time, Berkshire now appears to be set on building up its position in this bank.

And I can see why.

This bank has done a commendable job in recent years. After stumbling a bit coming out of the financial crisis (which may have something to do with Berkshire’s buying and selling of this stock), the bank has posted some fantastic numbers since fiscal year 2013 – earnings per share has more than doubled since then.

Fundamentally, the bank is operating about as well as it ever has.

And the valuation appears to be quite compelling here, with the stock down about 10% compared to where it ended the last quarter. The valuation is well below the broader market (as most banks are), but you’re also looking at most basic valuation metrics that are discounted off of respective industry averages.

The only issue here for dividend growth investors might be the yield. At 2.20%, there’s something to be desired (even for a bank). But the company is regularly and aggressively increasing its dividend, with its most recent dividend increase coming in at almost 17%.

Delta Air Lines Inc. (DAL) – Purchased 10,066,483 shares. 

This transaction increased Berkshire’s stake up to 63,655,840 shares, an increase of 18.8% over last quarter.

Delta Air Lines Inc. is a global airline company.

This was a pretty aggressive increase to this holding. The airline is now a pretty large position in the portfolio after this move.

While this is a tough industry to operate (and invest) in, the dynamics are far more favorable today compared to where they were 10 or 20 years ago.

There’s much less competition, which means pricing is more reasonable. That more rational environment has, in my view, been key to Berkshire’s about-face on investing in airlines (Buffett has long argued against investing in this industry).

Still, high fixed costs and exposure to volatile fuel prices are key risks. And there’s still plenty of competition to go around.

But Delta has clearly improved itself across the board over the last decade. It’s now operating what appears to be a very high-quality business.

It went from losing a ton of money a decade ago (albeit during the financial crisis) to turning an impressive profit nowadays.

And the company is even paying a dividend – something that would have been unheard of not long ago. Sure, it’s not a high-yield stock (at less than 2.5%), but it’s a strong dividend for this industry. And it’s growing.

The valuation on the stock also appears to be attractive right now. The stock took a nice dip down to below $50 back in July, so it’s my guess that Berkshire added then. Even at ~$55/share, though, Delta’s valuation doesn’t appear to be undesirable. The sales multiple is less than 1, and the cash flow multiple (at 5) is about 15% lower than its three-year average. Plus, the stock is finally yielding something respectable.

General Motors Co. (GM) – Purchased 1,393,611 shares.

Berkshire’s position has been increased to 51,393,611 shares, which is an increase of 2.8%.

General Motors Co. is a multinational company that designs, manufactures, markets, and distributes vehicles and related parts. They also offer financial services.

Berkshire’s last transaction (during Q4 2017) regarding this position was to sell off 10 million shares, so it’s interesting that they’re swinging back around to increasing the stake once more. That said, the stock spent much of Q4 2017 well into the $40s, and the stock spent a good chunk of the last quarter in the mid-$30s.

And that might just be the reason for the turnaround here: valuation.

If you’re looking at cash flow, the P/CF ratio is sitting at 3.4. That’s well off of the three-year average of 4.4.

And the stock is offering a juicy yield of 4.20%.

However, GM has paid the same dividend for 11 quarters in a row. As a dividend growth investor, it’s tough to get excited about that. And the auto industry isn’t exactly fertile ground for the kind of reliable profit growth that portends regularly growing dividends.

But there’s no doubt that GM is an absolute juggernaut with an estimated 17.4% market share in the US (in 2017). This investment is obviously complementary to the holding in Axalta – Berkshire seems to be betting on the auto business, especially on the domestic side.

Goldman Sachs Group Inc. (GS) – Purchased 2,294,971 shares.

This transaction increased Berkshire’s position by 20.9%, with the holding now up to 13,254,490 shares.

Goldman Sachs Group Inc. is a global investment banking institution.

What’s pretty interesting about this purchase, when looked at on the whole of all the other transactions, is that Berkshire has been adding to some companies that can actually operate quite cyclically.

That means that a recession of some kind could hit some of these businesses (investment banking, automotive manufacturers, airlines, etc.) quite hard.

This isn’t tissue paper or food we’re talking about here. These aren’t typically recession-proof businesses.

What that tells me, more or less, is that Berkshire doesn’t anticipate any kind of near-term recession, which is something that Buffett has been reinforcing during recent interviews. That said, Buffett didn’t see the financial crisis ahead of time, either, so we have to take this with a grain of salt.

Goldman Sachs has posted some marvelous numbers in recent years, so it’s not a stretch at all to put some money in this name.

The valuation appears to be roughly fair right now – neither expensive nor cheap. Most basic valuation metrics are in line with their respective recent historical averages. However, as I just noted, Goldman Sachs is firing on all cylinders right now.

It’s not a prototypical dividend growth stock, nor is the yield particularly high (at under 1.5%). So dividend growth investors might not be looking at this one. But I can see why Berkshire is attracted to it, especially considering Buffett’s longstanding affinity for banks and financial institutions.

Liberty Global PLC Class A (LBTYA) – Purchased 1,584,592 shares. 

This transaction increased Berkshire’s stake by 58.4%, now up to 4,299,466 shares.

Liberty Global PLC, through its subsidiaries, provides various media and telecommunications services, such as video, broadband Internet, fixed-line telephone, and mobile telephone services.

Berkshire routinely trades around its various Liberty holdings – which are numerous.

I’ve discussed these trades ad nauseam in prior updates, but there’s not much to glean here. Berkshire regularly buys and sells shares in the various Liberty entities.

Southwest Airlines Co. (LUV) – Purchased 8,887,943 shares.

This position is now sitting at 56,547,399 shares, an increase of 18.6% over last quarter.

Southwest Airlines Co. is a major domestic airline carrier.

This was a pretty big increase to what was already a substantial airline holding. Interestingly, in percentage terms relative to the position, it was right in line with what Berkshire did with Delta.

What this tells me is that Berkshire sees Delta and Southwest as the airlines to bet on moving forward. Berkshire already had larger investments in these two airlines. And the moves that played out in this quarter (which includes the sales we’ll go over below) has only served to put more distance between its holdings in its top two airlines and its bottom two.

Southwest, like the other three airlines that comprise the “Big Four” domestic carriers, has greatly benefited from the consolidation that has led to less competition and more rational pricing. Fundamentals have greatly improved, and the company is now operating at an outstanding level across the board.

The risks I pointed out above carry over to Southwest, of course.

But there’s no doubt the company is currently operating at a very high level.

Meanwhile, the valuation doesn’t appear to be fully pricing that in, which is perhaps why Berkshire took the opportunity to add to its position in a bit way.

You’re looking at basic valuation metrics (like P/E ratio, P/S ratio, etc.) that are more or less in line with their recent respective historical averages, but, as I just noted, Southwest is clearly currently operating much better than it has over much of the last 5-10 years.

So it’s a vastly improved company being valued much like it was a few years ago.

That said, it’s a tough investment for dividend growth investors like myself due to the low yield (1.08%) and short dividend growth history.

Teva Pharmaceutical Industries Ltd. (TEVA) – Purchased 2,709,585 shares. 

This transaction increased Berkshire’s stake by 6.7%, with the position now up to 43,249,295 shares.

Teva Pharmaceutical Industries Ltd. is the world’s largest generic pharmaceutical manufacturer. The company also develops and sells branded pharmaceuticals across a variety of health categories.

Berkshire initiated its position in this stock in Q4 2017, and it has been aggressively adding ever since. This investment follows up on Berkshire’s purchase of more than 21 million shares just last quarter.

I’ve noted a few times that I’ve been a bit perplexed by this investment. The heavy debt, suspended dividend, and significant workforce cut that Teva’s dealing with isn’t exactly indicative of the high-quality business aspects that Buffett usually goes after.

However, due to the size of the position, it’s likely that Combs or Weschler is behind the investment (both outstanding investors in their own rights).

Teva has had some issues of late, as my previous comment notes. Price erosion on generics have hurt the company, with its woes exacerbated by burdensome debt. But the workforce cut and suspended dividend are moves meant to help alleviate some its debt load – sitting at close to $30 billion.

And there’s no doubt the stock was cheap when Berkshire initiated its position – and it’s still quite cheap even today.

There’s no P/E ratio to look at because the company has registered losses of late, but annual sales are sitting at a multiple of just over 1. And the P/CF ratio, at 4.9, is substantially lower than its three-year average ratio of 7.8.

I still think this is more of a short-term trade (on a pricing rebound and Teva’s restructuring efforts) rather than a long-term investment, but a healthcare initiative that Berkshire is partnering up on could be providing part of the reasoning behind the move on Teva.

US Bancorp (USB) – Purchased 9,846,153 shares. 

This purchase brings Berkshire’s stake up to 100,693,874 shares, which is an increase of 10.8%.

US Bancorp is the nation’s fifth-largest bank, with branches located in 25 states in the Western and Northern United States.

Berkshire added over 3.7 million shares to its holdings in US Bancorp just last quarter. Now sitting at over 100 million shares, this is a pretty large position in the portfolio (worth over $5.3 billion at current prices).

That shouldn’t really be a surprise, as this is an older position that plays into Buffett’s affinity for banks.

And if you’re going to go big on a bank, you could do a lot worse than US Bancorp.

EPS has more than doubled over the last decade. The company is a FCF monster. Revenue is up handily since the financial crisis. And fundamentals across the board are fantastic.

The valuation looks roughly fair here. The P/E ratio, at ~14, is right in line with its five-year average. And the stock yields 2.26%, which is also right in line with the five-year average yield.

Buffett has never been against buying a high-quality company at a fair price. I think that’s what you’re getting here.

This is a stock I wish I would have bought a while ago, but the heavy dividend cut during the financial crisis held me back. That said, the bank has been aggressively increasing its dividend in recent years. And there doesn’t appear any end to those big dividend increases in sight.

Sales

Monsanto Co. (MON) – Sold 18,970,134 shares. 

This position has been eliminated.

Monsanto Co. provides agricultural products for farmers, including seeds, biotechnology traits, herbicides, and precision agricultural tools.

As I noted many times over recent quarters, I believed this was a simple merger arbitrage play on the acquisition of Monsanto by Bayer AG (BAYRY). The latter had agreed to pay $128/share for the former, and with the stock lagging that level, Berkshire was busy buying up the stock on the idea that the merger was a lock.

Well, Bayer completed its acquisition of Monsanto, which saw Berkshire get paid the cash for its shares. Pretty simple.

Verisk Analytics, Inc. (VRSK) – Sold 284,778 shares. 

This position has been eliminated.

Verisk Analytics, Inc. is data analytics and risk assessment company that serves customers globally.

Berkshire almost sold out of this position in Q1 2018, where they sold off almost 84% of its holding. I noted during the last update that Berkshire would likely dispose of its remaining stake fairly quickly. And I was right.

However, it’s a bit surprising to me that they’d want to move out of the business.

Verisk has been operating at a fairly high level over the last decade, with the business more than doubling revenue and quadrupling EPS over that time frame. Net margin is well into the double digits. ROE is also quite high. Debt is manageable.

It might be a valuation call – the stock is up almost 50% over the last year – but most metrics are in line with their respective recent historical averages.

Either way, it’s inconsequential to Berkshire. It’s a pretty small company. And the position was relatively small, so it wasn’t moving the dial anyway.

American Airlines Group Inc. (AAL) – Sold 1,300,000 shares. 

This position has been reduced by 2.8%, now down to 44,700,000 shares.

American Airlines Group Inc. is a major US airline carrier.

This wasn’t a big move, but I think it was telling.

As I discussed earlier on, it appears that Berkshire is gravitating toward two of its four airline positions: Delta and Southwest.

And it appears to be moving away from the other two (one of which is American Airlines).

None of the airlines, including this one, appear to be expensive, but it’s admittedly a bit difficult to get a fix on valuations because these businesses have improved so dramatically in such a short period of time.

For perspective on that, American Airlines registered a GAAP loss of $6.54 per share in FY 2013.

That was only a few years ago. The company is now well into the green – showing GAAP EPS of $3.90 for FY 2017. That’s a big swing.

Whether or not the good times are here to stay remains to be seen, but there’s just no doubt that these companies are putting out some fantastic numbers right now.

Berkshire still owns a lot of stock in this airline. So there’s no need to ring the alarm. But it does appear that they’re moving heavily into the two aforementioned names in a preferential way.

Charter Communications Inc. (CHTR) – Sold 718,688 shares. 

This sale reduced Berkshire’s stake down to 7,504,185 shares, which is 8.7% lower than last quarter.

Charter Communications, Inc. provides cable services throughout the US, and is the fourth largest such provider.

This sale comes on the back of Berkshire’s sale of more than 266,000 shares in Q1 2018. It’s tough to say if they’re slowly selling out, but it does appear that they’re taking some profit. Notably, the stock was priced higher during Q1, when the smaller sale (of the two) occurred.

I was admittedly a bit surprised to see Berkshire get into this business in the first place, only because the fundamentals weren’t that great across the board. But Buffett has long been highly interested in media companies (with that interest arguably only exceeded by financial institutions).

That said, this company has rapidly improved itself since becoming the parent company of Time Warner Cable and Bright House Networks in mid-2016. The stock has reflected that, moving up from the low $200s to just over $300 (where it’s now sitting).

The valuation doesn’t appear to be outrageous right now, especially in light of that marked improvement.

In my view, it must be a situation where Berkshire simply sees better places for that capital.

Phillips 66 (PSX) – Sold 10,960,378 shares.

This sale knocked Berkshire’s stake down to 34,729,514 shares, which is 24% lower than last quarter.

Phillips 66 is primarily an independent refiner, with assets in midstream and chemicals.

So Phillips 66 announced in February 2018 that it had agreed to repurchase 35 million shares from Berkshire for $93.725 per share. That saw Berkshire reduce its stake in the refiner by 35 million shares in Q1 2018.

That sale, per a statement by Buffett, was purely driven by the desire to eliminate the regulatory requirements that come with ownership levels above 10 percent.

Phillips 66 ended Q2 2018 with 464 million shares outstanding, so I suppose it’s a bit surprising to see Berkshire sell so many shares. A small sale would have easily satisfied the need to be under 10%. Berkshire now owns roughly 7.5% of Phillips 66 (depending on where the numbers fall for Q2) – well below that 10% threshold.

There’s a lot to like about Phillips 66. Recent results have been nothing short of breathtaking. This is a company that’s being run fantastically. EPS for Q2 2018 more than doubled off of Q2 2017.

Even though the stock has been on a heck of a run – it’s up about 45% over the last year – the valuation doesn’t appear to be overextended. Said another way, the performance of the business has largely increased the value of the business and driven a stock price increase. There doesn’t appear to be any significant valuation expansion at work.

A quick check on most basic valuation metrics show that they’re in line with their respective recent historical averages.

And investors are getting paid for their ownership. The stock yields a comfortable 2.64%. And since the company is routinely increasing its dividend, their should be plenty of aggregate dividend income to be had.

United Continental Holdings Inc. (UAL) – Sold 1,021,421 shares. 

Berkshire reduced its holdings down to 26,684,542 shares, which is 3.7% lower 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.

This wasn’t a particularly large sale, but it does follow up on Berkshire’s sale of more than 500,000 shares in Q1 2018.

This just further reinforces the theme I’ve been discussing throughout this update: Berkshire appears to be moving slightly away from its holdings in United Continental and American Airlines in favor of its holdings in Delta and Southwest.

There’s nothing wrong with that. In fact, when you look at things on the whole, Berskshire has quite a significant stake in the airline industry. Gravitating toward the preferred players should be the obvious move.

This stock is like the others, in that it doesn’t appear to be at all expensive. However, it’s a bit difficult to pin that valuation down due to such a rapid change in business conditions. If those business conditions persist for the long term, these stocks are extremely cheap. It’s just that it’s difficult to tell if the good times are here to stay for an industry that’s been so plagued by investment challenges over many years.

Wells Fargo & Co. (WFC) – Sold 4,499,486 shares. 

This sale reduced this position down to 452,013,758 shares, which is 1% lower 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.

Berkshire cannot own more than 10% of this bank due to regulatory headaches that it’s unwilling to comply with.

As such, I’ve noted in prior updates (which I’m noting again) that Berkshire will likely have to routinely sell off small portions of this position, because Wells Fargo & Co. continues to buy back its own stock, reducing the available float of common stock.

The bank has something close to 4.9 billion shares outstanding, so Berkshire is now comfortably under the 10% threshold. This recent sale was relatively small (at 1% of the position), but it’s perhaps a bit surprising in that it wasn’t truly necessary in light of how far under 10% Berkshire is currently sitting (~9.2%).

With that in mind, Berkshire might not actually need to sell any more shares over the foreseeable future (the next 1-2 quarters, depending on buyback activity from Wells Fargo).

-Jason Fieber

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