Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), is arguably the greatest investor alive. What’s amazing about Buffett is that he doesn’t need fancy machines or computer algorithms to decide which companies to buy. He simply focuses on time-tested business models with strong branding and holds onto them for extended periods of time.

Though Buffett isn’t going to be right on every investment, he’s been right enough over the course of his six-plus-decade career to turn his roughly $10,000 in seed capital into almost $86 billion in net worth. That’s a compound annual rate of return that beats the stock market’s historical rate of return, inclusive of dividends and when adjusted for inflation, by a factor of four.

It’s time for investors’ quarterly look under the hood

Because of the Oracle of Omaha’s investing prowess, there’s perhaps no event more exciting — next to Berkshire Hathaway’s annual shareholder meeting — than the quarterly release of Berkshire’s 13F filing with the Securities and Exchange Commission (SEC).

Money managers with more than $100 million in assets under management are required to file their holdings with the SEC 45 days after a quarter ends.

Berkshire’s Feb. 14 13F filing gave Wall Street and investors a look under the hood at what Buffett and his team were up to between Oct. 1, 2018, and Dec. 31, 2018.

Sure, the data could be a bit old by now, given that six-plus weeks have passed since the new year began, but with a money manager like Buffett who has a tendency to buy and hold for long periods of time, the data tends to be more trustworthy than with other, more active money managers who hold hundreds of different securities.

What did Buffett’s 13F show?

Well, for starters, the Oracle of Omaha went back to his roots during the fourth quarter. Berkshire’s buying and selling action can essentially be grouped into four categories.

1. Betting big on financials

Warren Buffett’s bread and butter has always been his attraction toward financial sector companies. More specifically, Buffett tends to invest in large money-center banks and brand-name insurance companies. With few exceptions, money-center banks and insurers are cash cows that could be run with management’s eyes closed, and Buffett would have it no other way.

During the fourth quarter, Buffett added another 18.9 million shares of Bank of America (NYSE:BAC), close to 14.5 million shares of JPMorgan Chase, almost 4.4 million shares of U.S. Bancorp, and a couple million shares of Bank of New York Mellon, Travelers Companies, and PNC Financial Services. In total, not counting new positions created during the fourth quarter, 6 out of the 7 share additions came from the financial sector.

2. Unloading tech stocks

Buffett, who has historically avoided the technology sector, spent the fourth quarter lightening Berkshire’s exposure to the typically high-growth but volatile industry. After establishing a 41.4 million share position in Oracle in the third quarter, Berkshire disposed of its entire stake during the fourth quarter.

The Oracle of Omaha also sold just over 1% of his stake in Apple, reducing by almost 2.9 million shares, and bringing Berkshire’s ownership down to 249.6 million shares. Charter Communications, which provides residential cable service, was also trimmed by over 307,000 shares, or about 4% of Berkshire’s aggregate holdings in the company.

3. Lightening the load on airlines

Although the industry is far from being in a tailspin, Buffett and Berkshire Hathaway continued to lighten the load on select airlines during the fourth quarter. The company’s holdings in United Continental were reduced by over 4 million shares, or 15% as a whole, with Berkshire also parting ways with 1.2 million shares of Southwest Airlines, decreasing its holdings by about 2%.

During the sequential third quarter, Buffett had trimmed his stakes in American Airlines Group, Southwest Airlines, and United Continental. In other words, that’s two straight quarters of share-paring for United Continental and Southwest.

4. Focusing on value

Lastly, on a broader basis, it was a return to value-stock buying for Buffett. The lone nonfinancial he added to during the fourth quarter was General Motors (NYSE:GM). The 19.8 million shares added increased Buffett’s stake in General Motors by 37% to almost 72.3 million shares (about $2.4 billion in market value).

What makes General Motors so unique is that it boasts one of the smallest forward price-to-earnings ratios on Wall Street (6.1 times forward earnings). Understandably, automotive stocks often carry single-digit forward P/E ratios, but GM is currently valued modestly below its five-year average P/E ratio. When combined with a nearly 4% dividend yield, Buffett probably can’t pass up the potential value.

The same could be said of Bank of America. Even with a quintupling in its share price since 2011, Bank of America’s forward P/E of 10 is about 10% below its five-year average and the overall average for the financial sector. Also, as the most interest-sensitive of all money-center banks, B of A has been a big beneficiary of higher interest rates.

What Buffett’s 13F portends about economic growth

What’s really interesting is attempting to read the tea leaves from Buffett’s purchases and sells during the quarter to decipher what that might mean for the U.S. and global economy in 2019 and beyond.

Listen to any Buffett interview with a major news outlet and you’ll rarely hear hints of pessimism — and there’s a good reason for that. Even though the S&P 500 has undergone 37 corrections of at least 10% since 1950, each and every one of the previous 36 corrections (not counting the current correction) has been erased by a bull market rally. Buffett knows full well that staying long and buying time-tested businesses is a much smarter path to creating wealth than trying to time the market.

Yet, there are subtle clues from Buffett’s trades that he foresees a slowdown in the U.S. economy tied to actions taken by the Fed. Think about this for a moment: Higher interest rates are most immediately a positive for banks, because it allows them to pass along higher interest rates on credit cards and variable-rate loans. At the same time, businesses that are capital-intensive or rely on debt financing to grow, such as airlines and tech, respectively, don’t fare as well when the cost to borrow rises.

Buffett has always been something of a hound for value stocks, but his return back to basics in the fourth quarter with purchases of GM, Bank of America, and other financial stocks, while shunning tech and airlines, suggests that Buffett is de-risking and possibly foresees higher lending rates and a slowdown in the U.S. economy from 2018s GDP growth rates.

Keeping in mind that tea-leaf reading isn’t a college-endorsed course, it’s nevertheless an intriguing and plausible hypothesis for investors to consider after looking under Berkshire’s hood.

— Sean Williams

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