When Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett buys or sells a stock, everyone from Wall Street professionals to everyday investors pays close attention. That’s because Buffett has an incredible investment track record that includes an average annual return of 20.1% for his company’s Class A shares (BRK.A) since 1965.
While there are a number of reasons for Buffett’s nearly six-decade outperformance of the major stock indexes, such as his love of cyclical businesses and dividend stocks, it’s his opportunistic long-term approach to investing that might be his greatest not-so-secret weapon. With the understanding that every stock market correction and bear market decline throughout history has been a buying opportunity, Buffett uses big pullbacks in the broader market as an excuse to go shopping.
Through the first six months of 2022, Berkshire Hathaway bought or added to more than a dozen stocks. With all three major U.S. stock indexes firmly in a bear market, you can be certain Buffett is still on the offensive.
Berkshire Hathaway’s core holdings remain popular buys
For example, Buffett and his investment team were active buyers of tech stock Apple (AAPL) in both the first and second quarters of 2022. Even though it already accounts for more than 41% of Berkshire Hathaway’s $306 billion in invested assets, Buffett views Apple as a valuation pillar for his company.
Apple, which is the most-valuable brand in the world, according to Brand Finance, has an exceptionally loyal customer base and has leaned on innovation to drive its sales and profits higher. The company’s iPhone, which accounts for around half of U.S. smartphone market share, is the perfect example of this.
Aside from Apple’s ongoing transformation that emphasizes higher-margin subscription services, Buffett is a big fan of Apple’s capital return program. In addition to doling out more than $14 billion annually in dividends, the company has repurchased in the neighborhood of $520 billion of its common stock since the beginning of 2013.
Buffett and his investing team have also used the bear market plunge to pile into energy stocks — specifically Chevron (CVX) and Occidental Petroleum (OXY). The second quarter marked the first time this century Berkshire Hathaway had more than 10% of its invested assets tied up in the energy sector.
Buying shares of Chevron and Occidental Petroleum looks to be a way for Buffett to take advantage of above-average spot prices for crude oil and natural gas. Between Russia’s invasion of Ukraine throwing a monkey wrench into European energy supplies, and the pandemic reducing capital investment from global energy majors, meaningfully increasing oil and gas supply likely won’t happen for years. That would seem to be a recipe for elevated energy commodity prices.
While these core holdings remain popular buys for the Oracle of Omaha, none is his favorite stock.
Warren Buffett is likely buying his favorite stock once again
Though investors have used Berkshire Hathaway’s 13F filings with the Securities and Exchange Commission to ride Buffett’s coattails for decades, his favorite stock to buy isn’t going to show up in the company’s 13Fs. This “mystery” stock is none other than (drum roll) — Berkshire Hathaway.
Before July 17, 2018, certain criteria needed to be met for Buffett and Berkshire’s executive vice chairman, Charlie Munger, to repurchase shares of their company’s Class A and Class B common stock. Specifically, Berkshire Hathaway’s shares had to be valued at or below 120% of book value (i.e., no more than 20% above book value). In the more than five years leading up to July 17, 2018, Berkshire Hathaway’s common stock never dropped below this threshold, which therefore led to no share repurchases.
Then everything changed. On July 17, 2018, Berkshire Hathaway’s board passed new criteria to give their star investing duo more freedom to buy back stock. As long as the company has $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet — and both Buffett and Munger agree that shares of the company trade at an intrinsic discount — buybacks can be executed without any cap.
In the four years since the board passed these new buyback rules, Buffett and Munger have overseen the repurchase of $62.1 billion of Berkshire Hathaway’s Class A and Class B common stock. Put another way, Buffett has spent more buying back his own company’s shares in the last four years than he’s spent buying shares of Apple and Chevron combined — and he’s probably not done.
As of last weekend, Berkshire Hathaway’s shares ended at a 29% premium to book value. With the exception of a brief downturn in June 2022, this is the lowest price-to-book-value for Buffett’s company since early 2021.
One of the key reasons Buffett and Munger are buying back so much stock is that it often rewards shareholders. In addition to helping existing shareholders boost their ownership in Berkshire Hathaway, having fewer shares outstanding has the potential to increase earnings per share for a company with steady or growing net income. In other words, it can make Berkshire Hathaway more fundamentally attractive.
What’s more, buying back $62.1 billion worth of Berkshire stock over the past four years is a not-so-subtle reminder that Buffett is willing to bet on himself and his cyclically driven portfolio of investments and owned businesses. Even though recessions are inevitable, periods of economic expansion last substantially longer. Berkshire’s investment portfolio and roughly five dozen owned companies are well positioned to take advantage of these disproportionately long periods of expansion.
When Berkshire Hathaway reports its third-quarter operating results, don’t be surprised if Warren Buffett’s favorite stock was a popular buy once again.
— Sean Williams
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Source: The Motley Fool