When Berkshire Hathaway’s (BRK.A) (BRK.B) billionaire CEO Warren Buffett speaks, Wall Street and the investment community are compelled to pay close attention.
Since taking the reins of Berkshire Hathaway in the mid-1960s, the Oracle of Omaha, as he’s come to be known, has overseen just shy of a 5,000,000% aggregate return in his company’s Class A shares (BRK.A). An outperformance of this magnitude is what draws some 40,000 investors to Berkshire’s annual shareholder meeting each year to listen to Buffett speak about the economy, stocks, and his investment philosophy.
But you don’t have to wait until Berkshire Hathaway’s annual meeting to find out what stocks have been piquing the interest of one of Wall Street’s most-followed and successful investors.
Quarterly filed Form 13Fs with the Securities and Exchange Commission (SEC) — a 13F provides a snapshot of what Wall Street’s brightest money managers have been buying and selling — coupled with Berkshire’s quarterly operating results offer evidence of the companies the Oracle of Omaha and his team can’t stop investing in.
Based on quarterly 13Fs and Berkshire’s public operating results, billionaire Warren Buffett has been buying shares of two magnificent stocks on an almost quarterly basis for years.
Occidental Petroleum
Buffett and his team are currently overseeing a $403 billion, 44-stock investment portfolio at Berkshire Hathaway. No stock in this investor-facing portfolio has been purchased with more regularity since the start of 2022 than energy titan Occidental Petroleum (OXY).
Because Berkshire owns more than 10% of Occidental’s outstanding shares, it’s required to file Form 4 with the SEC anytime it purchases additional shares. On June 17, Buffett and his investment aides, Todd Combs and Ted Weschler, made their most recent purchase and increased Berkshire’s stake in Occidental to 255,281,524 shares. This nearly 29% stake has been built up by Buffett and his cohorts in just 30 months.
Macro catalysts likely represent a key reason for Warren Buffett to be optimistic about this “forever” holding.
During the COVID-19 pandemic, global energy companies were forced to substantially reduce their capital spending to account for historic oil and natural gas demand uncertainty. Even with capital expenditures (capex) returning to normal levels, it’s going to take years to work through the global crude oil supply chain constraints created by three years of minimal capex. This supply tightness should benefit the spot price of crude oil.
A higher spot price for oil is particularly important for Occidental Petroleum. Although it’s an integrated energy company that also operates downstream chemical plants, the bulk of its revenue and operating margin originates from its higher-margin drilling segment. When compared to other integrated oil and gas companies, Occidental is far more sensitive to changes in the spot price of crude oil. If macro factors continue to work in its favor, Occidental’s operating cash flow should disproportionately benefit.
On top of macro and cyclical catalysts favoring Occidental Petroleum, Buffett and his crew are likely also eyeing the more than 83.8 million Occidental common stock warrants Berkshire Hathaway holds. These warrants trace back to the $10 billion Berkshire handed over to Occidental in 2019 to aid with its purchase of Anadarko.
The Occidental common stock warrants Buffett’s company has in its back pocket can be exercised at $59.624 per share. This potentially represents a line in the sand the Oracle of Omaha would like to protect to ensure that these 83,858,848 warrants can be exercised for a profit.
Berkshire Hathaway
Although Warren Buffett and his investing crew haven’t purchased shares of Occidental Petroleum in all 10 quarters since the start of 2022, they have bought shares of another beloved stock for 23 consecutive quarters (through March 31), dating back to the summer of 2018. This “mystery” stock, which won’t be found on the company’s quarterly 13F, is none other than Berkshire Hathaway.
Prior to mid-July 2018, the rules governing share repurchases for Buffett’s company were rigid. More specifically, buybacks could only be undertaken if Berkshire’s stock fell to or below 120% of book value (as reported in the most recent quarter). Unfortunately, the company’s stock never dipped to or below this threshold, leading to no share repurchases being undertaken.
On July 17, 2018, things changed in a meaningful way for Berkshire Hathaway, Warren Buffett, and the company’s shareholders. The company’s board reworked the criteria governing share buybacks to include just two rules. Share repurchases could be made with no ceiling or end date as long as:
- Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet; and
- Warren Buffett believes shares are intrinsically cheap.
Since these new rules went into effect, Buffett has overseen the repurchase of more than $77 billion worth of his own company’s stock over 23 quarters.
One of the best aspects of share repurchase programs is that they incentivize long-term investing. Berkshire’s steadily declining outstanding share count is incrementally increasing the ownership stakes of the company’s patient investors.
Furthermore, companies with steady or growing net income, like Berkshire Hathaway, typically see their earnings per share (EPS) rise as their outstanding share count declines. In other words, share repurchases are making Berkshire even more attractive to fundamentally focused long-term investors.
Lastly, spending more than $77 billion to buy back shares of Berkshire Hathaway stock is a ringing endorsement from the Oracle of Omaha that he firmly believes in his company’s long-term ethos. He and his investment aides have packed Berkshire’s investment portfolio and owned assets with predominantly time-tested, cyclical businesses that benefit from long-winded economic expansions.
With Buffett’s company having $189 billion in cash, cash equivalents, and U.S. Treasuries at its disposal, as of the end of March, it’s highly likely that this share-buyback streak has increased to 24 consecutive quarters through June.
— Sean Williams
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Source: The Motley Fool