There are a number of great money managers on Wall Street, but few, if any, can hold a candle to the “Oracle of Omaha,” Warren Buffett. Since Buffett became CEO of Berkshire Hathaway (BRK.A) (BRK.B) in the mid-1960s, he’s overseen a greater than 4,900,000% aggregate return in his company’s Class A shares (BRK.A), and practically doubled up the annualized total return, including dividends, of the benchmark S&P 500.

Patient investors have become financially independent mirroring the Oracle of Omaha’s investments. This can be done by analyzing Berkshire’s quarterly Form 13F filings with the Securities and Exchange Commission. A 13F details what Wall Street’s brightest minds purchased and sold in the most recent quarter.

But while Berkshire Hathaway’s 13Fs have clued investors into a number of businesses Buffett appreciates, the Oracle of Omaha’s favorite stock to buy — one which he’s added to for 22 consecutive quarters — won’t be found on his company’s 13F.

Apple and Occidental Petroleum have been popular buys, but neither is Buffett’s favorite stock
A quick glance at Berkshire’s $361 billion portfolio would appear to suggest that tech stock Apple (AAPL) is Warren Buffett’s favorite business. After all, it accounted for 42.5% of invested assets as of the closing bell on March 6.

Innovation is a big reason Apple held the title of world’s largest publicly traded company for so long (it only recently ceded this title to Microsoft). Since upgrading iPhone to handle 5G speeds in late 2020, the company’s flagship smartphone has accounted for half or more of domestic smartphone market share. Even though Warren Buffett doesn’t understand the mechanics of how an iPhone works, he fully understands consumer behavior and the exceptional loyalty of Apple’s customers to its products.

But what investors may have overlooked is Apple’s innovation beyond its physical products. CEO Tim Cook is overseeing an extended transformation that has Apple focused on various subscription services. Subscriptions should smooth out Apple’s revenue recognition during iPhone upgrade cycles, steadily lift the company’s operating margin over time, and encourage Apple’s customers to stay within the company’s ecosystem of products and services.

However, the best aspect of owning a lot of Apple stock for Warren Buffett might be its unbeatable capital-return program. Apple is returning $14.8 billion annually in dividends to its shareholders, and has repurchased in excess of $600 billion worth of its common stock since the start of 2013. Buffett is a huge fan of businesses that reward long-term-minded investors like himself.

The other stock in Berkshire’s portfolio that you’d probably think is Warren Buffett’s favorite to buy is energy juggernaut Occidental Petroleum (OXY). Since the beginning of 2022, the Oracle of Omaha and his investment aides, Ted Weschler and Todd Combs, have purchased more than 248 million shares of Occidental — a position with a market value of $15.2 billion.

Although energy stocks haven’t played a big role in Berkshire’s portfolio throughout much of this century, the past couple of years have represented something of a change of heart for Buffett and his team. Piling into Occidental the way Berkshire’s investment team has signals that they believe the spot price of crude oil will remain above historic norms, or perhaps head even higher.

While it’s tough to predict the directional movements of energy commodities with any certainty, there are factors working in Buffett’s favor. For instance, capital underinvestment for multiple years from energy majors during the COVID-19 pandemic has led to tight global oil supply. When the supply of an in-demand commodity is constrained, it’s not uncommon for the price of that commodity to rise.

A higher spot price for crude oil would be noteworthy for two reasons for Occidental. First, it generates the lion’s share of its revenue from its drilling operations. If the price of oil climbs, it disproportionately benefits, when compared to other integrated oil and gas operators.

Secondly, Occidental is still digging itself out of debt. The company is counting on a higher spot price to fuel the steady paydown of its remaining debt.

Meet the stock Warren Buffett has purchased for 22 consecutive quarters
Though it’s abundantly clear that Apple and Occidental Petroleum are core holdings in the $361 billion portfolio Warren Buffett oversees at Berkshire Hathaway, neither stock has been purchased by the Oracle of Omaha for 22 consecutive quarters.

To find Warren Buffett’s favorite stock, investors will want to peer beyond the company’s 13Fs and take a closer look at Berkshire Hathaway’s quarterly operating results. Contained within these operating results is a section on share repurchases. That’s right — the stock Buffett genuinely can’t stop buying is shares of his own company.

Share buybacks at Berkshire Hathaway took a big turn in mid-July 2018. Prior to this point, repurchases could only be undertaken if the company’s shares traded at or below 120% of book value (i.e., no more than 20% above reported book value in the most recent quarter). Since Berkshire Hathaway’s stock never retreated to or below this preset threshold, the company went years without any share repurchases.

Everything changed on July 17, 2018, which is when Berkshire’s board reworked the covenants governing share repurchases to allow Warren Buffett and the late, great Charlie Munger to work their magic.

Under the new criteria, as long as Berkshire Hathaway has at least $30 billion in aggregate cash, cash equivalents, and U.S. Treasuries on its balance sheet, and both Buffett and Munger agreed that shares of their company were intrinsically cheap, buybacks could continue with no preset cap.

During the fourth quarter of 2023, Buffett oversaw the repurchase of 3,623 Class A shares and 660,585 Class B shares (BRK.B) of Berkshire stock at a total cost of almost $2.15 billion. Since the criteria for buybacks changed in July 2018, Buffett has bought back more than $74 billion worth of his company’s stock, with repurchases occurring every single quarter.

The reason the Oracle of Omaha and his team spend such a small fortune on buybacks is because it’s the easiest way to reward investors who share their long-term vision. Since Berkshire doesn’t pay a dividend, regular buybacks are incrementally increasing the ownership stakes of existing shareholders.

Furthermore, buying back stock can lift earnings per share (EPS) for businesses with steady or growing net income. As Berkshire’s outstanding share count shrinks over an extended period, EPS should increase. Ideally, this makes Berkshire Hathaway appear even cheaper to investors.

Regardless of how well or poorly the U.S. economy and stock market are performing, Warren Buffett buying back shares of his favorite stock, Berkshire Hathaway, is a virtual given.

— Sean Williams

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Source: The Motley Fool