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 2019 — 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!

Purchases

Purchased 54,000 shares of Amazon.com, Inc. (AMZN)
Purchased 31,081,000 shares of Bank of America Corp. (BAC)
Purchased 61,419 shares of Red Hat Inc. (RHT)
Purchased 3,150,787 shares of U.S. Bancorp (USB)

Sold

Sold 284,102 shares of Charter Communications Inc. (CHTR)
Sold 39,002,016 shares of USG Corporation (USG) – SOLD OUT

Purchases

Amazon.com, Inc. (AMZN) – Purchased 54,000 shares. 

Berkshire Hathaway now owns 537,300 shares in this retailer. That’s an increase of 11.2% over last quarter.

Amazon.com, Inc. is a multinational technology company that operates the world’s largest e-commerce marketplace and cloud computing platform.

Warren Buffett has been on record multiple times to note that he’s not actually behind this investment. While he hasn’t revealed whether it’s Todd Combs or Ted Weschler, we do know it’s one of the two.

That said, this knowledge doesn’t in any way detract from the noteworthiness or merit of the investment.

Combs and Weschler both have the full support of Buffett, and they’ve been routinely touted as Buffett-like investors who will surely one day co-manage the common stock portfolio for Berkshire (after Buffett retires or passes on).

I don’t think there’s any investor out there who would doubt Amazon.com’s prowess as a business. It’s been remarkable what they’ve done.

Not only have they upended and totally revolutionized retail, especially on the e-commerce side, but they’ve totally upended and revolutionized cloud computing. To do what they’ve done in two industries – two industries that aren’t necessarily even related to one another – is unprecedented.

Rightfully so, Buffett has commended Jeff Bezos time and time again. Bezos is the kind of visionary that really only comes around once in a generation.

Looking at the business, the numbers are just plain gaudy.

Revenue is up almost tenfold over the last decade. EPS is up likewise. They produced more than $17 billion in free cash flow last year. It’s incredible.

Meanwhile, they’re finally putting some solid profitability numbers together. Retail is a business model with razor-thin margins, but Bezos has smartly made moves in technology to bolster the overall company’s net output.

All that said, there does appear to be a recent slowing in terms of growth. With a market cap nearing $1 trillion, it’s not a shock to see the law of large numbers start to catch up here.

Obviously, the big issue here is the valuation. And I think that’s what’s been surprising about Berkshire making their investment. Buffett has been lauded for his value acumen, and it’s tough to make a case for Amazon.com being a cheap stock.

The stock’s P/E ratio is over 70. The P/S ratio, at 3.5, is rich for a retailer, and it’s even above the stock’s own five-year average P/S ratio of 2.9.

Also, it’s notable that the stock doesn’t pay a dividend, which is something that Buffett has been keen on for decades.

I think Berkshire basically saw that it’s been missing out on one of the most amazing businesses ever put together, and they’ve rectified that.

While it’s hard to make a case that the stock will continue to offer the market-crushing returns going forward, Amazon.com’s competitive position is arguably as strong as it’s ever been.

Bank of America Corp. (BAC) – Purchased 31,081,000 shares.

This transaction increased Berkshire’s stake by 3.5%, now up to a total of 927,248,600 shares.

Bank of America Corp. is an American multinational investment bank and financial services company. It’s one of the largest banks in the United States by total assets.

I think what’s particularly notable about this holding is the fact that it’s now by far Berkshire’s largest single bank holding. Buffett is undoubtedly squarely behind this move, as well as the position as a whole.

The position now has a market value north of $24 billion. That makes it the second-largest (by market value) holding in Berkshire’s common stock portfolio (behind only Apple Inc. (AAPL)).

That places it well ahead of Berkshire’s Wells Fargo & Co. (WFC) holding in terms of market value. Berkshire’s stake in Wells Fargo dates back many years.

While Buffett has publicly been supportive of Wells Fargo, Berkshire’s been simultaneously slowly reducing its sizable stake in the bank. Buffett has foreshadowed that selling by stating that it’s purely motivated by his desire to stay under a 10% ownership threshold, which would trigger additional regulatory hurdles.

However, Berkshire’s stake in Bank of America is pushing it right up against that 10% threshold that Buffett has been so loath to cross over. Indeed, Bank of America has approximately 9.3 billion shares outstanding. By my math, Berkshire owns right about 9.96% of the bank. With Bank of America routinely buying back its own shares, thereby reducing its outstanding share count, Berkshire will almost surely be over 10% very soon.

I think the takeaway here is that Buffett is optimistic about banks in general, but he’s particularly high on Bank of America. At the same time, his enthusiasm about Wells Fargo has seemingly faded more than he’s publicly let on.

Bank of America’s fundamentals across the board are impressive. Less than a decade ago, this bank could barely get out of its own way. It was struggling mightily. Give Brian Moynihan credit – he’s turned this bank around totally, as it’s now a powerhouse across the board.

While its size limits its growth prospects both in absolute and relative terms, they’ve become a high-quality enterprise that lives up to potential.

For perspective on that, earnings per share have compounded at an annual rate of 57.89% since FY 2014, even while revenue is up less than 10% over that five-year time frame.

Most metrics are either industry-leading, or not far behind.

Looking at the valuation, it reads like a classic Buffett play.

The bank is trading hands for book value, even though it’s operating at levels it’s never seen before. The earnings multiple is below 10 right now. That’s almost half the broader market’s earning multiple.

And the stock offers an appealing yield of 2.74% right now. That’s more than 140 basis points higher than the stock’s own five-year average yield. The bank’s aggressive dividend growth of late has a lot to say about this.

If you’re looking for a quality bank investment right now, you could do a lot worse than following Buffett into Bank of America.

Red Hat Inc. (RHT) – Purchased 61,419 shares. 

This move increased Berkshire’s position by 1.2%, now up to 5,171,890 shares.

Red Hat Inc. is a multinational software company that provides open-source software products to enterprises.

As I’ve noted in prior updates, I saw this purely as a merger arbitrage play. Berkshire was playing the upside after International Business Machines (IBM) announced its intent to acquire Red Hat in cash.

Due to the nature and size of the investment, it’s almost certain that Buffett wasn’t behind this one.

IBM closed on its acquisition of Red Hat on July 9, 2019. That means Berkshire had to give up its shares in Red Hat, collecting a nice premium for their troubles.

All in a hard day’s work!

U.S. Bancorp (USB) – Purchased 3,150,787 shares. 

Berkshire now owns 132,459,618 shares in the bank, which was an increase of 2.4% over the last update.

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

This is a regional bank that operates almost as a national bank. Its market cap of over $80 billion tells you how large this institution actually is.

This is a rather old holding for Berkshire. The market value of their stake in U.S. Bancorp is over $6.7 billion. Clearly, this has Buffett’s hands all over it.

As I discussed earlier, Buffett is generally quite cheerful regarding U.S. banks.

And I can see why.

In a market that’s become fairly expensive, banks remain one of the last vestiges of value.

Indeed, U.S. Bancorp is available for just over 12 times trailing earnings per share. The P/B ratio is sitting at 1.7. While not as low as Bank of America, that is disconnected in comparison to U.S. Bancorp’s own five-year average P/B ratio of 2.0.

The stock is also offering a juicy yield of 2.89% right now.

That’s about as high as I’ve ever seen it. It’s substantially higher than the stock’s own five-year average yield of 2.3%. And the bank continues to increase its dividend year in and year out, with no end to that in sight.

Strong fundamentals are underlying that growing dividend.

Revenue has compounded at an annual rate of 4.48% over the last decade, while earnings per share sport a 10-year CAGR of 17.50%.

Most major metrics are extremely competitive.

They don’t have the kind of eye-popping turnaround that Bank of America has had, but that’s more because U.S. Bancorp has been a well-run organization for many years.

This bank looks like a very solid long-term investment here.

Sales

Charter Communications Inc. (CHTR) – Sold 284,102 shares.

This sale reduced Berkshire’s position down to 5,426,609 shares, which is a reduction of 5.0% over last quarter.

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

This is now the sixth quarter in a row in which Berkshire Hathaway has reduced its position in Charter Communications.

They spent all of 2018 selling off the stake. They’ve been repeating that same theme throughout 2019.

In my view, this is classic profit taking. Simple as that.

Buffett has long had a fascination with media companies.

Charter Communications obviously fits the mold.

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.

The stock price has reflected that, moving up from the low $200s to almost now $400/share since that merger occurred.

But I wouldn’t be surprised to see Berkshire sell some more Charter Communications stock in Q3. They’ve spent six quarters reducing their stake. I don’t see any reason as to why they wouldn’t continue that.

However, with a stake still valued at just over $2 billion, they’ve got a long way to go before they completely sell out of this one.

For contrarians out there, it’s difficult for me to see why anyone would be crazy to take the opposite side of this trade.

The company is plainly doing much better than it was a few years back. But the stock price has reflected that new reality. A lot of the juice has already been squeezed.

USG Corporation (USG) – Sold 39,002,016 shares. 

Berkshire completely sold out of this position.

USG Corporation manufactures construction material, most notably drywall and joint compound.

This investment dates back to 2008, when Berkshire acquired convertible notes. It converted the notes into common stock in 2013, which turned Berkshire into USG’s largest shareholder.

There’s nothing to read into regarding this sale.

USG agreed to be acquired by Knauf KG. This acquisition closed in April.

It wasn’t really a case where Buffett “sold” the stock. Rather, it was bought from him.

USG is now a subsidiary of Knauf KG, a family-owned German company.

-Jason Fieber

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