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 third quarter of 2019 — the quarter ending September 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 1,207,844 shares of RH (RH) – NEW POSITION
Purchased 7,467,508 shares of Occidental Petroleum Corporation (OXY) – NEW POSITION
Sales
Sold 31,434,755 shares of Wells Fargo & Co. (WFC)
Sold 1,640,000 shares of Sirius XM Holdings (SIRI)
Sold 370,078 shares of Phillips 66 (PSX)
Sold 750,650 shares of Apple Inc. (AAPL)
Purchases
RH (RH) – Purchased 1,207,844 shares.
This is a new position for Berkshire Hathaway.
RH is an American luxury home-furnishings company that sells its various merchandise through retail centers, catalog, and online.
Based on the size of this position (currently valued at slightly over $210 million), I’m fairly confident that it was either Todd or Ted that initiated this stake.
Nonetheless, it’s notable whenever Berkshire Hathaway adds a new position to its common stock portfolio – a portfolio that’s very concentrated for its overall size (now coming in at over $230 billion).
While this might not have been a Buffett play, it’s certainly right in his wheelhouse.
Buffett has long been a fan of home-furnishings companies. In fact, he regularly recounts his experience with aggressively pursuing the Nebraska Furniture Mart business from Rose Blumkin. Nebraska Furniture Mart is still a subsidiary of Berkshire Hathaway.
Of course, RH is on the opposite end of the price spectrum from Nebraska Furniture Mart.
But that doesn’t make it any less appealing as a long-term investment. RH is one of the clear leaders in luxury home-furnishings.
Fundamentally, the business is sound. And it’s improved dramatically relative to where it was at 5-10 years ago.
Revenue has quadrupled over the last decade. Meanwhile, it looks like they’ve finally turned the corner on profit over the last few years – swinging from regular losses to significant profits and positive free cash flow.
It’s difficult to get a real handle on the valuation, though. That’s largely because FY 2019 numbers are so gaudy, and I’m honestly not sure how sustainable recent success is.
That said, the valuation is not as attractive as when Berkshire Hathaway bought.
The stock spent much of Q3 between $120 and $140 per share. It’s now trading at ~175/share.
Berkshire’s buy gives a lot of credence to the stock, which will likely only push it higher in the near term. If you’re interested in buying this name, it might make sense to let the dust settle on the stock and see if the business can keep winning.
Occidental Petroleum Corporation (OXY) – Purchased 7,467,508 shares.
This is a new position for Berkshire Hathaway.
Occidental Petroleum Corporation is an independent energy exploration and production company, operating as one of the largest O&G companies in the world.
This is a very interesting purchase, in my view.
First, it would seem likely that Buffett was behind this, despite the fact that it’s a relatively insignificant purchase in terms of its size.
I say that because Buffett is in charge of the massive financing deal with Occidental Petroleum, which is seeing Berkshire Hathaway lend $10 billion to Occidental Petroleum to help finance a massive takeover deal. In exchange, Berkshire Hathaway is getting preferred stock with an 8% annual dividend, along with a warrant to purchase up to 80 million shares of Occidental at an exercise price of $62.50 a share.
With Occidental Petroleum’s stock currently under $38 after spending all of Q3 well under $62.50, it’s pretty obvious that Berkshire Hathaway is not taking stock at the warrant exercise price.
I can only assume that Buffett is taking a little bit of cheap common equity here, on top of the preferred stock that’s offering that big dividend.
It’s notable that the common stock is now yielding over 8%. However, there are some concerns that Occidental Petroleum may have to cut the common stock dividend. The expensive takeover deal, asset sales, a heavy debt load, and falling oil prices conspire to work against them.
Occidental Petroleum’s stock is down 39% YTD, which has made the valuation appealing.
For perspective, the P/CF ratio is 3.7. That’s less than 1/3 that of the stock’s own three-year average P/CF ratio of 13.2. Every basic valuation metric you could possibly look at is way off its recent respective historical average.
There are a lot of moving parts here. And this company is offering you all the drama you can handle. But if you like the legacy assets, agree with the prices they’re getting on the asset sales, don’t think the debt load is unmanageable, and believe in the long-term success of the $58 billion takeover of Anadarko Petroleum Corporation, the stock is a deep value play worth a good look.
Sales
Wells Fargo & Co. (WFC) – Sold 31,434,755 shares.
This sale reduced Berkshire Hathaway’s stake in the bank down to 378,369,018 shares, a reduction of 7.7% over the prior 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.
We can be sure that Buffett was behind this sale.
Berkshire Hathaway’s stake in Wells Fargo dates back about 30 years, and it’s one of Berkshire Hathaway’s largest common stock positions in their equity portfolio.
Buffett has been clear in the past that he’s aiming to stay under the informal 10% ownership threshold of any bank, which would trigger certain regulatory headaches that Buffett would prefer to avoid.
Since Wells Fargo continues to buy back a lot of its own stock, reducing its outstanding share count in the process, Buffett has almost no choice but to routinely sell off small bits of stock in order to stay under the 10% threshold.
I’m taking Buffett at his word here, so I don’t think there’s much we can read into this.
That said, the rest of us mere mortals face no such concerns over a 10% threshold. So we’re free to buy stock in Wells Fargo, if we so wish.
I’d argue it’s not a bad idea to do just that.
The stock has languished in recent years after a number of scandals rocked the bank, but they’re finally getting back on the right track.
New CEO Charles Scharf is an outsider with a solid track record with other major financial companies. Time is passing. And the scandals are moving into the rear view mirror.
Meanwhile, recent results have been encouraging.
The stock is a beaten-down value play in a sector that’s cheap in and of itself. The P/E ratio is under 12, and it’s trading hands at a P/B ratio of 1.3.
Plus, it offers a 3.81% yield – higher than what a lot of utilities are offering right now.
Wells Fargo ain’t going anywhere. But this valuation might not be around much longer. I think Buffett would prefer to buy this stock under different circumstances. It might make sense for you to consider doing the same.
Sirius XM Holdings (SIRI) – Sold 1,640,000 shares.
Berkshire Hathaway reduced its stake by 1.2%, now down to 136,275,729 shares.
Sirius XM Holdings Inc. is a satellite radio broadcasting company that broadcasts a variety of channels in the US for a subscription fee through its proprietary satellite radio systems.
This was a very minor change in what’s a very minor position. So I’m not sure how much we can really glean from this move.
It might have been a simple valuation call, though.
Berkshire Hathaway initiated its stake in Sirius XM Holdings during Q4 2016, when the stock could have been had for a bit over $4/share. It spent much of this past third quarter over $6 per share.
The P/E ratio doesn’t seem to be egregious compared to what the stock ordinarily commands, but the current multiple on cash flow is slightly above the stock’s own three-year average P/CF ratio.
Beyond the valuation call, it could have been a case of raising capital for other opportunities.
Based on the size of this sale, and based on the size of the position as a whole, it seems likely that Todd or Ted is behind the investment. And since they both manage much smaller sums than Buffett does, they do sometimes have to be more thoughtful around trimming positions in order to raise capital for other opportunities.
As an individual investor, however, I don’t think there’s much of a takeaway here, unfortunately.
Phillips 66 (PSX) – Sold 370,078 shares.
Berkshire Hathaway now owns 5,182,637 shares. That’s 6.7% lower than the prior quarter.
Phillips 66 is primarily an independent refiner, with assets in midstream and chemicals.
I’ve stated before that I believe Berkshire Hathaway is systematically selling out of its stake in Phillips 66. This sale comes after a rather large disposal of over 6.3 million shares in Q1 of this year.
It would seem very likely that Buffett is behind this sale. That’s because he’s been on record as being behind the Phillips 66 stake in the first place, which was a significant investment worth many billions of dollars at one time.
It’s difficult to say why Buffett soured on the refiner. He’s expressed optimism about their prospects every time he’s been asked about Phillips 66 publicly. However, it’s clear that he’s privately less positive about the business.
As a long-term shareholder in the refiner, I must say that I’m much more optimistic – both publicly and privately.
Phillips 66 has been operating at a high level since being spun off from ConocoPhillips (COP) in 2012. The fundamentals are excellent. And they’re paying a large, reliable, and growing dividend.
The valuation also is not crazy here. That’s with the stock being now priced much higher than it was for the bulk of Q3 (when Berkshire Hathaway was selling).
Indeed, since the stock is currently priced much higher than it was when during the third quarter, and since Berkshire Hathaway’s remaining position is relatively small, I wouldn’t be surprised to see them sell out completely when we get the Q4 update in February.
Even with that in mind, I remain a happy long-term shareholder who’s content to collect his growing dividends.
Apple Inc. (AAPL) – Sold 750,650 shares.
Berskhire Hathaway reduced its stake by 0.3%, and it’s now sitting at a total of 248,838,679 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 sale might make headlines across mainstream media, but don’t be fooled.
I seriously doubt that Buffett was behind this move, first of all.
It was immaterial. That’s speaking in terms of both the position size and how much capital was raised. It’s nothing more than a rounding error for Buffett’s purchasing power within the portfolio.
However, Todd and Ted both manage much smaller amounts of money. And so they must be more vigilant in terms of culling positions to raise capital, if they see a better opportunity elsewhere.
This move looks similar to the Sirius XM Holdings sale I discussed earlier.
That is to say, it appears to be a combination of a value call and a move to raise capital.
While I hesitate to call Apple an “expensive” stock, it’s not as cheap as it was even just earlier this year – it’s up a monstrous ~66% YTD, before reinvested dividends.
Meantime, most basic valuation metrics are now above their own respective recent historical averages. The P/E ratio is over 22, which is as high as I’ve seen it in recent years.
This bump in valuation has also had the effect of lowering the stock’s yield. Whereas the stock has averaged a yield of 1.8% over the last five years, it now offers a yield of only 1.17%.
It’s simply not a cheap stock anymore.
With that in mind, I think Todd or Ted saw the heightened valuation as a chance to trim the position in order to unlock capital for other opportunities. Perhaps the RH position discussed earlier.
As a long-term dividend growth investor who doesn’t sell stock, I’m not interested in trimming my personal position in the world-class enterprise that is Apple. But I wouldn’t buy it here, either. There are too many other compelling ideas in tech.
-Jason Fieber
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