Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has a knack for getting Wall Street’s attention. It probably has to do with the more than 3,800,000% aggregate return he’s overseen for his company’s Class A shares (BRK.A) since taking on the lead role in 1965.
The Oracle of Omaha’s phenomenal investing track record has allowed new and tenured investors to ride his coattails to sizable gains for decades. It’s ultimately what makes Berkshire Hathaway’s Form 13F filings such anticipated events.
Berkshire Hathaway’s 13Fs don’t tell the complete story
A 13F is a required quarterly filing with the Securities and Exchange Commission (SEC) by money managers and high net worth individuals with at least $100 million in assets under management. The investment portfolio Buffett and his team oversee at Berkshire Hathaway topped $342 billion in value, of last week.
A 13F allows investors to see what the smartest money managers on Wall Street bought and sold in the most recent quarter. Though 13Fs have an obvious flaw — they provide a 45-day-old snapshot of a fund’s or company’s holdings, which could have meaningfully changed over six-plus weeks — they’re still helpful in that they can alert investors to stocks, sectors, industries, and trends that are piquing the interest of some of the world’s most influential money managers.
Following the closing bell on February 14, Berkshire Hathaway filed its fourth quarter 13F with the SEC. Although articles aplenty will be written about Buffett’s trading activity during the fourth quarter, you might be shocked to learn that Berkshire’s 13F doesn’t provide a complete picture of all the stocks Buffett’s company is holding.
In 1998, Berkshire Hathaway acquired reinsurance giant General Re for approximately $22 billion. While General Re’s reinsurance operations were the crown jewel of this buyout, General Re also owned a specialty investment firm, New England Asset Management (NEAM). When Berkshire Hathaway purchased General Re, it also acquired NEAM.
Today, NEAM remains an owned but separate entity operating under the Berkshire Hathaway umbrella. In other words, Warren Buffett doesn’t dictate/advise where New England Asset Management should put its $5.43 billion in assets under management to work. Nevertheless, this secret portfolio of Warren Buffett’s owns stakes in 117 different securities (common and preferred stock, as well as exchange-traded funds), as of Dec. 31, 2022.
Thanks to this secret portfolio, Warren Buffett now owns a brand-new FAANG stock.
Warren Buffett’s secret portfolio just added a new FAANG stock
When I say “FAANG,” I’m referring to the following five companies:
- Facebook, which is now a subsidiary of Meta Platforms (META)
- Apple (AAPL)
- Amazon (AMZN)
- Netflix (NFLX)
Google, which is now a subsidiary of Alphabet (GOOGL) (GOOG)
As many of you who follow the Oracle of Omaha’s buying and selling activity are likely aware, Apple is Berkshire Hathaway’s largest position by a significant amount. Apple comprised 41% of Berkshire’s $342 billion in invested assets as of the closing bell on Feb. 14, 2023. Apple was also one of only three stocks Buffett and his investing team added to during the fourth quarter.
Likewise, Amazon has been a Berkshire Hathaway holding for four years (since the first quarter of 2019). Previous comments made by the Oracle of Omaha suggest that he wasn’t the mastermind behind scooping up shares of the world’s leading e-commerce company. Rather, it was one of his investing lieutenants, Todd Combs or Ted Weschler, that built what’s become a $1.06 billion stake in Amazon.
Prior to Berkshire Hathaway’s and New England Asset Management’s latest 13F filings, Buffett’s only exposure to the remaining three FAANGs — Meta, Netflix, and Alphabet — came indirectly from owning shares of Markel. That’s now changed.
During the fourth quarter, New England Asset Management acquired 17,100 shares of Alphabet — specifically, the Class A shares (GOOGL).
Alphabet checks all the appropriate boxes
The answer to “Why Alphabet?” is really simple and boils down to three factors: market share, cash flow, and valuation.
To start with, Alphabet operates a veritable monopoly in internet search. Based on data from GlobalStats, Google has accounted for no less than 91% of global search share every month since December 2018.
Even though ad spending is cyclical, having a nearly 90-percentage-point share advantage over the next-closest search engine competitor affords Google exceptional pricing power when dealing with advertisers. With the understanding that the U.S. and global economy grow over long periods, Alphabet’s ad-driven operations are a clear beneficiary.
Secondly, Alphabet is nothing short of a cash cow, which affords it the luxury of aggressively reinvesting in a variety of high-growth initiatives. Last year, it generated $91.5 billion in operating cash flow. This immense cash generation is helping the company expand the reach of cloud infrastructure service Google Cloud, which has gobbled up an estimated 10% of worldwide cloud service infrastructure share, based on the latest report from Canalys.
To add to this point, the incredible cash flow generated from Google, coupled with Alphabet’s $99 billion in net cash, cash equivalents, and marketable securities, is allowing the company to reinvest in streaming platform YouTube, which is the second most-visited social site in the world. Alphabet is currently working on ways to increase the monetization of short-form videos known as YouTube Shorts. More than 50 billion Shorts are being viewed daily!
And thirdly, Alphabet is historically cheap with regard to both its future earnings potential and cash flow. Despite averaging a forward price-to-earnings ratio of 25.4 over the past five years, it’s currently valued at 15.5 times Wall Street’s consensus profit for next year.
What’s more, Alphabet has averaged a multiple of 18.6 times its year-end cash flow over the past five years. Based on Wall Street’s most forward-looking cash-flow estimate for the company, investors can scoop up shares of Alphabet right now for just 6.5 times projected cash flow in 2026.
In other words, Alphabet checks all the boxes the Oracle of Omaha would look for in an investment.
— Sean Williams
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Source: The Motley Fool