While there are a number of prominent money managers on Wall Street, none are followed as closely by the investment community as Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett.

One reason investors gravitate to the Oracle of Omaha is his track record. Though he’s not infallible, Buffett has overseen a nearly 5,500,000% aggregate return in his company’s Class A shares (BRK.A) since becoming CEO in the mid-1960s. On an annualized total return basis, which includes dividends, Berkshire Hathaway has practically doubled up the return of the benchmark S&P 500 spanning six decades.

The other lure for investors is Buffett’s willingness to be an open book. Whether through his annual letter to shareholders or during Berkshire’s annual meetings, Buffett often shares the characteristics he looks for in “wonderful companies,” as well as offers his take on the American economy.

But what Warren Buffett might be best known for is his penchant for value investing. There’s little that puts a smile on his face more than being able to put his company’s capital to work in a time-tested company with a sustainable moat at an advantageous price.

Though there are plenty of examples of the Oracle of Omaha nabbing amazing value stocks throughout history, there’s one stock he keeps buying regardless of valuation.

Warren Buffett has a knack for finding amazing deals hiding in plain sight
Despite selling more than 500 million shares of Apple (AAPL) between Oct. 1, 2023 and June 30, 2024, Berkshire Hathaway’s top holding represents the perfect example of Warren Buffett stumbling on an amazing company at a highly favorable price point.

When Buffett began building his company’s stake in Apple during the first quarter of 2016, the tech giant’s trailing-12-month (TTM) price-to-earnings (P/E) ratio ranged from 10 to 12, which was well below that of the S&P 500. With the exception of the dot-com bubble, Apple’s stock had never been cheaper.

While its iPhone has remained dominant, in terms of domestic smartphone market share, Apple’s growth has been spearheaded by its Services division. This is a subscription-driven segment designed to keep users loyal to its ecosystem of products and services. It should also improve the company’s operating margin over the long run, as well as lessen the revenue peaks and troughs associated with iPhone upgrade cycles.

Today, Apple is hardly a bargain. As of the closing bell on Oct. 8, Apple’s stock was valued at a multiple of more than 34 times TTM earnings per share (EPS). Although Buffett hinted during Berkshire’s annual shareholder meeting in May that paring down his company’s stake in Apple was done for tax purposes, it’s quite possible valuation also came into play.

Berkshire Hathaway’s No. 3 holding, Bank of America (BAC), serves as another example of Warren Buffett pouncing on a time-tested business that was historically inexpensive.

Following the financial crisis, Buffett invested $5 billion into BofA to shore up its balance sheet and received preferred stock and warrants in return. When this investment was announced in August 2011, Bank of America was trading at less than 38% of its book value. Something of an unwritten rule on Wall Street is to buy high-quality bank stocks at or below their book value and unload them at or near two times book value.

In the years since the financial crisis, Bank of America has been able to put its legal issues firmly in the rearview mirror. What’s more, it’s benefited immensely from being the most interest-sensitive of America’s money-center banks. The 525-basis-point increase in the federal funds rate by the Federal Reserve between March 2022 and July 2023 added billions of dollars in net interest income to BofA’s bottom line.

But with Bank of America stock now trading at a 16% premium to its book value, it’s perhaps no surprise that more than $10 billion in BofA stock has been unloaded by Buffett since mid-July.

The Oracle of Omaha is unwavering in his desire to get a good deal — with one exception.

This is the only stock Buffett keeps buying, regardless of its valuation
Despite spending a small fortune to build up Berkshire Hathaway’s stakes in Apple, Bank of America, Chevron, and Occidental Petroleum, there’s one stock that dwarfs them all, in terms of the amount of money Warren Buffett has invested.

However, investors aren’t going to find this company listed in Berkshire’s quarterly filed Form 13Fs. This is the filing that provides investors with a concise snapshot of what Wall Street’s brightest money managers have been buying and selling.

Rather, investors will have to dig into Berkshire Hathaway’s quarterly operating results to find evidence of Buffett purchasing his favorite stock. Toward the end of each quarterly filing, just prior to the executive certifications, you’ll find the page that lists Berkshire Hathaway’s share repurchase activity — because the stock Buffett keeps buying, regardless of valuation, is shares of his own company.

Berkshire Hathaway’s share buyback program has evolved quite a bit since the midpoint of 2018. Prior to July 2018, buybacks were only allowed if Berkshire Hathaway’s stock fell to or below 120% of its book value. Since Berkshire’s stock never fell below this line-in-the-sand threshold, Buffett was never able to spend a penny on buybacks.

On July 17, 2018, Berkshire Hathaway’s board amended the rules governing buybacks to allow Warren Buffett and then right-hand man Charlie Munger (who passed away in November 2023) more freedom to execute buybacks. These simplified new rules allowed for indefinite share repurchases with no 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 views his company’s stock as intrinsically cheap.

There’s a lot of leeway with this second point, which is what allows Buffett to regularly buy back his company’s stock. Since July 2018, Buffett has spent close to $78 billion repurchasing shares of Berkshire Hathaway, including $345 million during the June-ended quarter.

Additionally, buybacks have been made in all 24 quarters (through June 30, 2024) since these new repurchase rules were enacted. You’d have to go back to 2008 to find the last time Berkshire Hathaway’s stock was as pricey as it is now, relative to its book value… and yet Buffett keeps buying!

Because Berkshire Hathaway doesn’t pay a dividend, conducting buybacks is the easiest way for Buffett to reward his company’s shareholders and incent long-term thinking. Steadily reducing the company’s outstanding share count is incrementally increasing the ownership stakes of long-term investors.

To boot, companies with steady or growing net income, like Berkshire, tend to enjoy an EPS boost with fewer shares outstanding. This can make their stock more attractive to investors.

With Berkshire Hathaway sitting on an all-time record $276.9 billion in cash, cash equivalents, and U.S. Treasuries, as of the end of June, the Oracle of Omaha has every incentive to keep buying back his company’s stock, regardless of valuation.

— Sean Williams

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Source: The Motley Fool