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 first quarter of 2019 — the quarter ending March 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!
Purchases
Purchased 483,300 shares of Amazon.com, Inc. (AMZN) – NEW POSITION
Purchased 5,375,456 shares of Delta Air Lines, Inc. (DAL)
Purchased 9,398,538 shares of JPMorgan Chase & Co. (JPM)
Purchased 407,992 shares of PNC Financial Services Group Inc. (PNC)
Purchased 934,679 shares of Red Hat Inc. (RHT)
Sold
Sold 1,322,788 shares of Charter Communications Inc. (CHTR)
Sold 6,343,127 shares of Phillips 66 (PSX)
Sold 1,198,186 shares of Southwest Airlines Co. (LUV)
Sold 928 shares of Verizon Communications Inc. (VZ) – SOLD OUT
Sold 16,965,129 shares of Wells Fargo & Co. (WFC)
Purchases
Amazon.com, Inc. (AMZN) – Purchased 483,300 shares.
This is a new position for Berkshire Hathaway.
Amazon.com, Inc. is a multinational technology company that operates the world’s largest e-commerce marketplace and cloud computing platform.
We already know who wasn’t behind this investment.
Buffett announced weeks ago that one of his lieutenants (although we don’t know which one) made this investment.
Regardless, it’s still Berkshire making this move. And it’s noteworthy.
An investment in Amazon.com is a one-two punch that is unmatched by any other firm in the world.
On one hand, you have the e-commerce side of the business. It’s dominant, but the margins are razor thin.
This is a trend that is clearly taking over. Just take a walk through your local mall to see what’s happening to retail. People are increasingly buying everything from toothpaste to shoes online, and it’s highly unlikely this will abate.
On the other hand, you have the AWS side of the business.
Cloud computing is arguably just as exciting a trend as e-commerce is. It’s perhaps even more exciting because the margins are much fatter. Companies large and small alike are moving their data and operations into the cloud, which bodes well for the most dominant player in that space.
The company’s growth over the last decade is truly otherworldly. It’s breathtaking. What Bezos has done with this company will be admired and studied for generations.
Revenue is up almost tenfold over the last ten years. So is EPS. Growing at 10x over the course of a decade is beyond amazing, especially considering the fact that the starting base was already pretty large.
Buffett has admitted time and again that he totally missed the boat on this one. And then he had a hard time justifying the valuation once the investment picture became much clearer.
Well, it looks like one of his lieutenants didn’t necessarily agree with the valuation aspect, as they decided to jump in anyway. The stock is up over 500% over the last five years, so it’s super interesting that a Buffett disciple and Berkshire investor is buying the stock here.
Regarding the valuation, the stock is trading hands for a P/E ratio of over 78. The sales multiple is nearing 4, which is very high for a retailer (although not all that high for a tech/cloud company). The P/CF ratio, at almost 27, is also quite high, even when comparing that directly to a tech/cloud company like, say, Microsoft Corp (MSFT).
I don’t think anyone could argue it’s a cheap stock. However, these multiples largely depend on the company’s growth moving forward. If it can continue these blistering growth rates, it’s really not all that expensive at all.
A stock that lacks a dividend and trades hands for almost 80 times earnings is outside of my realm, but it looks like Berkshire believes that Amazon.com is set up very well to continue dominating its respective industries.
Delta Air Lines, Inc. (DAL) – Purchased 5,375,456 shares
Berkshire Hathaway now owns 70,910,456 shares in this airline company. That’s an increase of 8.2% over last quarter.
Delta Air Lines Inc. is a global airline company.
This move is very interesting because Buffett has noted time and again that he’d like to remain under 10% of ownership in any single airline due to the extra regulatory/paperwork headaches that such an ownership stake would come attached with.
He spoke with CNBC not too long ago about what happened here with Delta Air Lines.
Buffett stated that the airline had announced that they had bought back 26-27 million shares and borrowed $1 billion to do so.
While he was happy to see this, it meant that the reduction in the outstanding share count had pushed Berkshire Hathaway’s ownership stake to over 10%.
Since the 10% threshold had already been crossed, and the damage had been done, Buffett just figured he would go ahead and buy a whole lot more of the airline.
I’ve noted in a number of these prior updates that the airline investments have been surprising, if only because Buffett had been so adamantly against the entire industry for years. He did all he could to break the investment thesis.
I’ve agreed with the prior negativity.
This industry is fraught with low margin, intense competition, high fixed costs, extreme sensitivity to economic cycles, and exposure to volatile fuel prices. Also, switching costs don’t practically exist.
So it was shocking to see him move 180 degrees on this.
But the industry dynamics have become more favorable for investment.
Massive consolidation has taken the players down to only a handful, which has made pricing more rational.
And globalism and an increase in quality of life worldwide has made air travel more available and attractive than ever before. It was only a few decades ago that flying around the world was reserved for the elite. It’s not like that any longer.
Indeed, the company has moved far away from the days of big losses and no margin.
EPS has increased from $0.70 in FY 2010 to $5.67 in FY 2018, which is a compound annual growth rate of 29.98%. Revenue is up almost 50% over that time frame. Net margin has more than quadrupled. And the balance sheet has been cleaned up.
It does now seem like Buffett prefers Delta Air Lines out of all of the airline investments. It’s the largest airline position in Berkshire Hathaway’s common stock portfolio.
I also like this stock over the other airline stocks.
The valuation is very appealing here, with a sub-10 P/E ratio. Every basic metric is well off of its respective five-year average.
Plus, the stock offers a fairly appealing yield of 2.54%. And that on a dividend that has been regularly and aggressively increased since its initiation in 2013.
JPMorgan Chase & Co. (JPM) – Purchased 9,398,538 shares.
This transaction increased Berkshire Hathaway’s position by 18.8%. They now own 59,514,932 shares.
JPMorgan Chase & Co. is a global investment bank and financial services company. It’s the largest bank in the United States.
This is the third quarter in a row in which Berkshire Hathaway has gone big on this big bank. Based on the size of the transactions and the size of the position, it’s almost certainly Buffett behind this.
And it fits his modus operandi. Buffett has been a fan of banks for many, many years.
There’s not much to dislike about banking in general, but this bank in particular has been a stellar operator for many years. Jamie Dimon, the CEO of JPMorgan Chase, is arguably the best banker in the business.
Particularly impressive was the most recent quarter.
Take your pick. Every single number the bank posted for Q1 FY 2019 was astounding.
They reported record revenue of $29.1 billion; credit card sales volume was up 10%, with merchant processing volume up 13%; and EPS increased 11.8% YOY.
Surprisingly, the valuation on this stock is quite appealing. I’m sure that’s why Buffett has been loading up.
The P/E ratio is under 12, which is very reasonable for a bank. The P/B ratio, at 1.5, might look a touch high. But this is a very high-caliber bank.
Meanwhile, the stock offers an attractive and market-beating yield of 2.91%. And the company has increased its dividend for eight consecutive years, with a five-year dividend growth rate of 12.8%.
I think it’s a great long-term investment here, and I’m also buying this stock for my high-quality dividend growth stock portfolio.
PNC Financial Services Group Inc. (PNC) – Purchased 407,992 shares.
Berkshire Hathaway’s position is now up to 8,671,054 shares, which is an increase of 4.9% over last quarter.
PNC Financial Services Group Inc. is a bank holding company and financial services corporation.
Another bank. This should not be a surprise. Buffett has long had a love affair with banks and insurance companies due to the access to enormous sums of low-cost capital and ability to earn a low-risk return from the float.
This bank is more of regional player. It’s not the massive institution that JPMorgan Chase is.
But the stock is slightly cheaper across a number of basic valuation metrics. The P/B, for example, is only 1.2.
And that lower valuation shouldn’t necessarily indicate lower quality.
This bank has done very well over the last decade.
Earnings per share compounded at an annual rate of 10.50% between FY 2009 and FY 2018. Net margin has more than doubled. Book value is up nicely.
The stock also offers a yield of 2.95% right now. That’s obviously very tempting in this market. The bank has also increased its dividend for eight consecutive years, with a five-year dividend growth rate of 14.6%.
If you’re looking for a regional player, I think one could do a lot worse than following Buffett into this high-quality bank.
Red Hat Inc. (RHT) – Purchased 934,679 shares.
This transaction increased Berkshire Hathaway’s stake by 22.4%. The position is now up to 5,110,471 shares.
Red Hat Inc. is a multinational software company that provides open-source software products to enterprises.
I don’t think there’s a lot to glean from this move. As I noted in the last quarterly update, it’s pretty clear that this is simple merger arbitrage. Based on the nature of this and the size of the transaction, I would bet that Buffett isn’t behind it.
International Business Machines (IBM) announced on October 28, 2018 that it was buying Red Hat in a deal valued at $34 billion. Since Berkshire Hathaway initiated a position in Red Hat in Q4 2018, I find it very likely that they got in right after the deal was announced.
What looked to have transpired here is, one of Buffett’s lieutenants had some extra cash for this quarter and decided to up the ante on the arbitrage play.
The deal is for IBM to pay $190/share in cash for each share of Red Hat. Since Red Hat’s stock started 2019 off at below $175/share, it’s clear that Berkshire saw some additional room for this one to run as the merger came closer to closing.
Red Hat’s stock is now sitting at a bit over $185/share, so most of the juice from this lemon is already squeezed.
Sales
Charter Communications Inc. (CHTR) – Sold 1,322,788 shares.
Berkshire Hathaway’s stake is now at 5,710,711 shares. That’s a reduction of 18.8% over last quarter.
Charter Communications, Inc. provides cable services throughout the US, and is the fourth largest such provider.
This is now the fifth quarter in a row in which Berkshire Hathaway has reduced its position in Charter Communications. They spent all of 2018 selling off the stake. And they’re now back at it in 2019.
In my view, this is profit taking. I’ve noted this before.
This company has radically improved operations over the last few years.
The stock has increased in price as a result.
Charter Communications was posting some rough numbers a few years back, but they’ve become a much better business since becoming the parent company of Time Warner Cable and Bright House Networks in mid-2016.
Berkshire got in before that big transition, and the stock has performed well.
The stock spent most of Q1 2019 up considerably from where it finished 2018 at.
The stake is still worth over $2.1 billion, so I wouldn’t be surprised to see more sales throughout 2019. Sales may even accelerate with the stock up ~31% YTD.
Phillips 66 (PSX) – Sold 6,343,127 shares.
This transaction dropped Berkshire’s position down to 5,552,715 shares. That’s 53.3% lower than last quarter.
Phillips 66 is primarily an independent refiner, with assets in midstream and chemicals.
This is a bit of a strange turn. I say that because Buffett stated many times publicly that he wanted to maintain a large position in this refiner over the long run. He only wanted to keep his position under the 10% threshold, which is what prompted some sales a while back.
However, I stated in the Q3 2018 update that I believed that Berkshire Hathaway is systematically selling out of its stake in Phillips 66.
Well, it looks like that’s exactly what’s happening here. It’s been clear for a while now, regardless of what Buffett was publicly stating.
It seems likely that this stake will be completely disposed of by the end of the year.
I’m a little bit surprised that Buffett has soured on this investment. There’s nothing I can see with the business that would seem to prompt it.
Phillips 66 has been reporting fantastic numbers since being spun off from ConocoPhillips (COP) in 2012.
Now, the refining business is very cyclical. Numbers can oscillate quite a bit even from quarter to quarter. But the long-term picture looks great. It’s fundamentally a very strong business.
Meanwhile, the valuation looks very appealing here.
The stock trades hands for a P/E ratio below 8. Even in an industry that typically features low multiples, that’s extreme.
Plus, the stock offers a sky-high yield of 4.12%.
And the company has been committed to a growing dividend since the spin-off, with a five-year dividend growth rate of 18.5%.
In my view, it’s a wonderful business at a wonderful price. I’m guessing Buffett just doesn’t like the dynamics of the business model, or he might think that refining margins will come under pressure in the future.
Southwest Airlines Co. (LUV) – Sold 1,198,186 shares.
Berkshire Hathaway reduced its position by 2.2%. This position is now at 53,649,213 shares.
Southwest Airlines Co. is a major domestic airline carrier.
This was a rather small move by Buffett standards. So I wouldn’t read too much into it.
Buffett has stated that he wants Berkshire to be under 10% ownership of the major domestic airline companies. He obviously broke that rule with the move on Delta Air Lines, but this sale does look to be in line with that.
Berkshire Hathaway sold 500,000 shares in Q3 2018, then they sold another 1,200,000 shares in Q4 2018. We see another small sale here in Q1 2019.
Based on the numbers, and based on where Berkshire Hathaway is sitting with their stake (owning close to 10% of Southwest Airlines), I think this is simply a sale to keep under the threshold.
Thus, I don’t think there’s much analysis needed here. Buffett clearly still likes the airlines, but I do think his favorite is Delta Air Lines.
Verizon Communications Inc. (VZ) – Sold 928 shares.
Berkshire Hathaway sold out of this position.
Verizon Communications Inc. is a multinational telecommunications conglomerate.
This was a tiny position for Berkshire Hathaway. It makes almost no difference either way for them. I guess I’m only surprised they didn’t get rid of it sooner. It was a rounding error for their portfolio.
That said, I personally think the stock is worth owning for the rest of us mere mortals.
The company is operating about as well as it ever has. The fundamentals across the board are great for a telecommunications company operating largely in a mature and competitive market.
And the 5G revolution that is upon us offers us some exciting new growth prospects in a staid industry.
Indeed, it’s possible that consumers in the future will mostly use data through the legacy telecom companies, rather than your traditional broadband providers. If so, that bodes very well for a company like Verizon Communications.
Either way, mobile data/communications is ubiquitous. It’s almost a utility at this point in terms of its everyday usage and necessity.
The company’s EPS has doubled over the last decade, while net margin has almost quadrupled over that time frame.
Looking at the valuation, the stock looks better than fairly valued right now. I don’t think it’s a steal. But it definitely does not appear to be expensive with a P/E ratio below 15. The P/CF ratio, at 6.8, is a good deal better than its three-year average of 7.8.
And the stock offers a yield of 4.24%. In a low-rate environment, that’s nothing to sneeze at.
It’s also likely that the dividend will continue to grow. The company has increased its dividend for 14 consecutive years – and that was before 5G.
I’m personally a happy long-term shareholder. But I can see why this small position was disposed of.
Wells Fargo & Co. (WFC) – Sold 16,965,129 shares.
This transaction reduced Berkshire Hathaway’s stake down to 409,803,773 shares. That’s a 4.0% drop from 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.
Again, this is another position that Buffett has been cautious about regarding the 10% threshold.
The issue here is that this is a very large position for Berkshire, and Wells Fargo continues to buy back a lot of its stock.
This forces Buffett to aggressively sell stock in order to stay under that 10% mark.
For perspective, Wells Fargo recorded net repurchases of $17.9 billion in FY 2018. That’s significant.
Wells Fargo ended FY 2018 with ~4.7 billion shares. The bank bought back another $3.9 billion in shares during Q1 2019. They’re now under 4.6 billion shares outstanding.
Berkshire Hathaway is comfortably under that 10% mark, but they may have to intermittently sell stock in order to keep pace with Wells Fargo and maintain a buffer.
That said, none of us regular investors have this kind of problem.
I last covered this stock in April 2018, showing why it was a compelling long-term investment opportunity. That article is due a refresh, but the overall long-term thesis remains unchanged.
Recent results have been encouraging. It appears that they’re finally moving past some of the scandals that have plagued the bank.
But the market is acting like this bank is going to go nowhere.
The P/E ratio is sitting near 10. The P/B ratio is at 1.2.
And it yields 3.93% right now, which slaughters most other banks. That’s more than 100 basis points higher than the stock’s own five-year average yield.
I honestly think that Buffett would be buying, not selling, this stock if the situation weren’t such that he had to maintain a position under 10% ownership of the bank.
I haven’t added to my position in some time, but I’m seriously considering picking up some shares here. In my opinion, the stock is an absolute steal.
-Jason Fieber
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