The recent top buys of one of the most successful investors could offer perspectives as the outlook is uncertain. And, could the Warren Buffett ‘formula’ help us step into his shoes, to attempt to highlight which companies are on discount?
The world's fifth-wealthiest person, Warren Buffett, runs the giant conglomerate holding company Berkshire Hathaway, which he grew from a humble size in 1970, to a giant today, thanks to smart and durable investments.
Last year, Berkshire’s cash pile jumped to a record high, leaving the conglomerate in a position of strength to face an economic downturn.
How does he do it? A snapshot of the Buffett ‘formula’
Warren Buffett identifies “excellent” businesses judging on the industry prospects, and the ability of the management to deliver attractive shareholder returns. Here are some of the elements that fit his disciplined investment philosophy.
- Margin of safety: Buffett believes in investing in securities trading at a ‘significant’ discount to his target price, which reflects the intrinsic value he believes where the stock should be trading. On top of that, he believes in investing in those businesses with large profit margins, as those tend to better weather economic downturns.
- A business easy to understand should help in the investment decision. He believes in selecting businesses with strong business moats that are very difficult to replicate, and that is relatively simple to operate. It should have predictable and proven earnings.
- The price should be fair for ‘wonderful’ businesses. Buffett is famous for believing in buying a wonderful business at a fair price, rather than a fair business at a wonderful price.
What is Berkshire buying?
Buffett’s company has deployed more than USD50 billion into stocks this year. As a result, Berkshire’s total stock portfolio value as of Q1, 2022, increased 10% from USD331 billion to USD364 billion, with most of its buying activity occurring in early March.
Berkshire has added immensely to oil and gas bets and value plays with an investment in HP and in its own stock by repurchasing Berkshire shares.
- Occidental Petroleum (ticker: OXY) has more than doubled this year, thanks to the surge in energy prices. Berkshire has boosted its stake to 17.4%, spending USD7 billion to become the largest shareholder, fuelling speculation of a full buyout. Berkshire also owns warrants to buy USD5 billion more Occidental shares.
- Chevron (ticker: CVX) has been a favorite of Buffet for some time, as Berkshire owned a stake worth more than USD25 billion in the oil giant at the end of March. The Chevron bet is now one of the top 4 equity holdings of the conglomerate.
- HP Inc. (ticker: HPQ) – Berkshire invested USD4.4 billion in legacy tech company HP Inc, becoming the largest shareholder with an 11.5% stake. HP is a mature company with minor growth. However, the company is buying back its own shares, boosting its earnings-per-share metrics. Investors are betting that HP can at a minimum maintain its market shares in PCs and printers.
- Activision Blizzard (ticker: ATVI) is a recently established position by Berkshire, in an arbitrage move, aiming to bank on the lower stock price of ATVI versus the Microsoft buyout cash offer price of USD95 per share. ATVI shares currently trade for ~USD78.8, reflecting the uncertainty of the deal getting approved by regulators, and investors’ concerns about the downside in that scenario. If approved, the USD68.7 billion purchase would be the largest ever tech acquisition.
Berkshire Hathaway (ticker: BRK-B): It’s also worth noting that Berkshire repurchased its own shares, spending more than USD3 billion, paying an average price of USD307 per share in the first quarter. The current price as of the 5th of July is ~USD275.7. Based on the public filing as of June 14, we may estimate Berkshire repurchased another USD1-2 billion of its stock. The amount is relatively small to the giant USD52 billion it spent on buybacks between 2020 and 2021. The conglomerate may be slowing down its own stock repurchase as it foresees more ‘deal’ opportunities down the road as economic conditions tighten.
What are Berkshire’s top public holdings?
The Berkshire investment portfolio of public companies is very concentrated with the top 5 holdings being Apple, Bank of America, American Express, Chevron, and Coca-Cola, making up over 75% of the total portfolio.
Making sense of the recent buys, adding to oil and gas companies could be strategic to boost bets of a prolonged supply-demand imbalance with tight oil supplies. Given the rising interest rate backdrop, HP Inc as a value play and Activision Blizzard as an arbitrage opportunity also fit Buffett’s approach.
Buffett’s tested investment philosophy focuses on identifying quality investment opportunities offering a significant discount. Berkshire’s buying is telling us he sees discounts in oil and gas companies!