Warren Buffett’s latest trades were just revealed via the most recent Berkshire Hathaway Inc. (BRK.B) 13F filing, which is a filing that gives us information on all of the transactions that took place over the third quarter of 2017 — the quarter ending September 30 — in the stock portfolio managed by the legendary investor.
This filing can provide some valuable insight into where Warren Buffett thinks the best investments might lie.
It’s also important to note that Buffett allows two other executives – Todd Combs and Ted Weschler – to authorize smaller transactions, so it’s difficult sometimes to decipher who bought and/or sold what.
Below, I’m going to go over every transaction and give some quick thoughts on each respective company.
I’m going to do my best to infer what each purchase and sale means, but it’s obviously impossible to know exactly what Warren Buffett or his lieutenants were thinking when each transaction was executed.
Let’s take a look!
Please keep in mind this list is for informational purposes only, and is not a recommendation to buy any specific stocks.
Purchases
Purchased 3,900,822 shares of Apple Inc. (AAPL)
Purchased 679,000,000 shares of Bank of America Corp. (BAC) – NEW POSITION
Purchased 831,685 shares of Monsanto Company (MON)
Purchased 3,340,000 shares of Synchrony Financial (SYF)
Sales
Sold 954,100 shares of Charter Communications, Inc. (CHTR)
Sold 17,057,975 shares of International Business Machines Corp. (IBM)
Sold 63,195 shares of WABCO Holdings Inc. (WBC) – SOLD OUT
Sold 3,755,002 shares of Wells Fargo & Co. (WFC)
Purchases
Apple Inc. (AAPL) – Purchased 3,900,822 shares.
This transaction increased Berkshire’s stake in Apple Inc. by 3%, with the position now up to 134,092,782 shares.
Apple Inc. designs, manufactures, and markets a variety of consumer electronics, including smartphones, tablets, personal computers, smartwatches, and portable music players. They’re vertically integrated with software and hardware. They also offer a variety of services designed to be used on and for their products.
What can one say about Apple that hasn’t already been said?
The stock has been on a breathless run this year, up almost 50% since the start of 2017. And one interesting catalyst that seemed to give the stock a bit of a jolt when it was somewhere around $100/share was the news that Berkshire Hathaway had initiated a rather large stake in the technology behemoth.
With demand for Apple’s products never seemingly greater than right now – with the arrival of the iPhone X testing that demand in a big way with a $999 phone – it might seem painfully obvious that Apple is a great long-term investment, but this stock was largely eschewed by the investment community just one year ago.
While I still believe it’s a great long-term investment, and while it’s a rather large technology holding for me personally, the valuation leaves a lot to be desired at this current time.
The P/E ratio for the stock is coming up on 19 right now, which is well in excess of the stock’s own five-year average P/E ratio of 13.5. One could just as well argue that the average is looking at a stock that was massively undervalued, but the growth potential for the company moving forward is perhaps limited, based the law of large numbers (Apple’s market cap is $880 billion).
Buying Apple at over $170/share isn’t particularly compelling, in my view, but Berkshire likely added to its stake last quarter at a much lower price – the stock was close to $150 just one month ago.
That said, if you’re already an Apple shareholder, continuing to hold this stock and collect that growing dividend seems like a pretty wise move. And you’ll be doing so alongside Berkshire.
Bank of America Corp. (BAC) – Purchased 679,000,000 shares.
This is a new position for Berkshire Hathaway.
Bank of America Corp. is a bank holding company and financial holding company that provides financial products and services to people, businesses, and institutional investors.
This transaction is really interesting.
So what didn’t happen here is Berkshire buying 700 million shares on the open market at prevailing prices.
What did happen here is a bit of a long story.
Buffett agreed to provide an injection of capital – to the tune of $5 billion – to Bank of America during the depths of the financial crisis, in exchange for preferred stock with a 6% dividend. While that would have been a pretty good idea in and of itself, the investment also came with warrants that gave Berkshire the option to later exchange that preferred stock for common stock at an exercise price of $7.14 per share (or 700 million shares).
Berkshire no longer owns the preferred stock, but they got something worth much more in exchange. They now have 700 million shares of Bank of America, shares which cost just over $7 per share but are exchanging hands for over $26 per share right now.
Since the shares are worth more than $18 billion on the open market, and since Berkshire spent $5 billion on the acquisition of shares, Berkshire is sitting on an unrealized gain of more than $12 billion here.
Obviously, if one could go out and buy shares in Bank of America at ~$7 per share today, you’d be a fool not to jump on that.
However, us mere mortal investors don’t have such opportunities.
Looking at the stock through that lens, though, the stock still doesn’t seem like a bad idea here.
The valuation is reasonable, with the bank’s valuation implying a price-to-book ratio at just over 1. The bank’s revenue and earnings are valued at a level in line with a lot of major US banks.
Moreover, the bank has really improved operations across the board after struggling during the financial crisis. They should be commended for this.
The one drawback might be the stock’s low yield. At just 1.83%, one can find far juicier yields with other bank stocks. But Bank of America did recently hike its dividend by 60%. I like few things more than a growing dividend, and Buffett is known for his affinity for the same. Well, this stock looks poised to continue growing its dividend in a big way for the foreseeable future with operations firing on all cylinders.
Monsanto Company (MON) – Purchased 831,685 shares.
This purchase brought Berkshire’s stake in Monsanto up to 8,873,469 shares, which is an increase of 10.3% over last quarter.
Monsanto Company provides agricultural products for farmers, including seeds, biotechnology traits, herbicides, and precision agricultural tools.
Monsanto is a high-quality company that would make a lot of sense for Berkshire Hathaway under ordinary circumstances. It has a great track record of growing its revenue, profit, and dividend. The fundamentals are strong across the board, with numerous competitive advantages in place to protect those fundamentals and the business itself.
However, I don’t believe Berkshire bought the stock because of these reasons.
Monsanto has agreed to be acquired by Bayer AG (BAYRY) for $128 per share. The stock is currently trading hands for $118 per share.
As such, this is a classic merger arbitrage opportunity.
So if an individual investor is looking at Monsanto here, the smart way to approach it would be to buy the stock with the thought of being happy no matter which way it goes. If the acquisition were to fall apart for whatever reason, you have a high-quality business on your hands. If the merger goes through, you pocket a tidy profit in short order.
In my view, this is how Berkshire is playing it. But since they recently acquired more shares at a higher price than they did when they first initiated their position, it would seem that they have a high degree of confidence in the deal going through (and/or they think the stock is valued attractively anyway).
I don’t think the valuation is extremely appealing here on a standalone basis, but buying the stock right now makes a lot of sense when looked at through the lens what I just noted.
Synchrony Financial (SYF) – Purchased 3,340,000 shares.
This purchase brought Berkshire’s stake in Synchrony Financial up to 20,803,000 shares, which is an increase of 19.1% over last quarter.
Synchrony Financial is a financial services company that offers a range of credit products through partnerships with retailers and service providers.
Berkshire first initiated a position in this financial services company last quarter. With the boosting of the position by almost 20% so quickly, it seems like Berkshire likes what they see here.
The economy is doing well. Many providers of credit are looking at a picture where credit quality is good and charge-offs remain relatively low. Unless something dramatic were to change in short order, Synchrony looks to be in a great position right now.
The company has excellent numbers across the board. While it was spun off from General Electric Company (GE) in 2015, meaning there’s not much of a recent history to look at within the context of a standalone business, there is nothing that would indicate anything other than a strong business right now.
And this investment fits right into Berkshire’s portfolio, as Buffett has long been known to aggressively invest in financial companies and credit providers. Berkshire’s massive stake in American Express Company (AXP) is somewhat analogous to Synchrony.
This all said, it’s somewhat difficult to value the business due to the lack of a lengthy independent recent history to judge. But the low P/E ratio (even for its industry) of 12.40 and great profitability would appear to indicate a very compelling long-term investment idea here.
Sales
Charter Communications, Inc. (CHTR) – Sold 954,100 shares.
This sale reduced Berkshire’s position by 10.1%, with the position now sized at 8,489,391 shares.
Charter Communications, Inc. provides cable services throughout the US, and is the fourth largest such provider.
The last transaction involving Berkshire and Charter that I can see was a Berkshire purchase of 106,000 CHTR shares in Q3 2016. With Charter’s stock jumping by ~24% over the last year, Berkshire may have seen an opportunity to reduce its stake in Charter at a much higher price than they built their position at.
Berkshire first began aggressively building a position in the cable company back in 2015, and it seems that they’ve largely been content to let that position more or less ride out since then.
It’s tough to value the stock because the company has been unprofitable fairly routinely over the last decade. But if we just look at the multiple of sales, the stock’s trading for a nice premium over its five-year average there.
Berkshire’s been known to buy and sell in waves, due to its ability to impact pricing and valuation with its moves. So it’s difficult to tell what they’re doing with this stock. But a decently-sized sale could foreshadow similar moves over coming quarters.
International Business Machines Corp. (IBM) – Sold 17,057,975 shares.
This sale reduced Berkshire’s stake to 37,026,698 shares, with is a reduction of 31.5% over last quarter.
International Business Machines Corp. is an information technology company, providing technology-driven solutions to customers globally.
This is the third quarter in a row in which Berkshire lightened up on its stake in IBM, with this particular transaction an aggressive bump over last quarter. As such, it seems likely that Berkshire is slowly selling out of its stake in Big Blue. It wouldn’t surprise me if Berkshire is completely sold out within a year, but time will tell.
Buffett noted not too long ago that he “revalued” (downward) IBM’s business and stock. IBM’s turnaround has not been as successful or as quick as many investors have anticipated (me included). Due to this, the business is not as strong or as appealing as it once was, with its economic moat, in my opinion, diminishing as a result.
And the stock is trading hands for a P/E ratio of just 12.43 right now, which is a severe discount to both the broader market and industry average.
If – and it remains a big if – IBM can finally turn the ship around, the stock could easily be “revalued” (upward) once more, with the market doing the heavy lifting on that.
While investors wait, though, the stock is offering a massive yield of 4.03%.
And they continue to buy back a ton of stock and grow their dividend at an appealing rate.
This is a long-term investment that’s turning out to be a bit more “long term” than many might have considered. It seems that even Buffett is in that camp. But it’s definitely a value and income play that could turn out to be a winner with even just a little bit of continued success in the company’s growth areas.
WABCO Holdings Inc. (WBC) – Sold 63,195 shares.
Berkshire has completely sold out of this position.
WABCO Holdings Inc. and its subsidiaries is engaged in the manufacture, marketing, and sale of electronic, mechanical, and mechatronic products for the commercial truck, trailer, bus, and passenger car manufacturers.
This sale shouldn’t be a surprise. Berkshire sold almost 3 million shares last quarter, leaving just a handful of shares to dump.
Berkshire has been more or less slowly and systematically selling out of this business for some time now. While this particular transaction is inconsequential for Berkshire, WABCO is an interesting small business that has great fundamentals pretty much across the board. The problem might be the fact that the business model is a bit cyclical. And the stock doesn’t offer a dividend at all.
After a 35% jump this year, the stock’s valuation is way up there.
The P/E ratio is sitting at almost 26, which is well in excess of the broader market, the industry average, and the stock’s own five-year average P/E ratio. Every basic metric is elevated compared to averages. It looks like Berkshire used an opportune time to move on from this stock.
Wells Fargo & Co. (WFC) – Sold 3,755,002 shares.
This sale reduced Berkshire’s stake by 0.8%, with Berkshire now owning 464,232,268 shares.
Wells Fargo & Co. is one of the four largest banks in the US, with diversified financial offerings across retail, commercial, and corporate banking services.
This sale is simple and straightforward, as was the transaction involving Berkshire selling shares in Wells Fargo last quarter.
Berkshire cannot own more than 10% of the bank due to regulations.
And so Berkshire has to occasionally sell stock in order to keep it below that limit.
Berkshire sold almost 12 million shares last quarter. While I noted that last quarter’s transaction brought Berkshire down below the 10% limit, I also noted that it wouldn’t be surprising for Berkshire to sell more shares in coming quarters. This is because Wells Fargo is continuously buying back its own stock, reducing its float. As it does so, Berkshire’s stake in the bank naturally increases by no action of its own (because it owns the same number of pie slices of a smaller pie).
As such, Berkshire may continue to sell off small portions of its Wells Fargo stake in the future, depending on its ownership size, the valuation of the stock, and the timing of Wells Fargo buybacks.
— Jason Fieber
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