For nearly six decades, Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has been dazzling Wall Street with his investing acumen. Even though he’s just as fallible as anyone else, Buffett has delivered a greater than 4,000,000% aggregate return for his company’s Class A (BRK.A) shareholders since taking the reins in 1965.
Riding the Oracle of Omaha’s coattails has been a profitable venture for more than a half-century, and it’s been made all the easier thanks to required filings by Berkshire Hathaway with the Securities and Exchange Commission (SEC).
Quarterly Form 13F filings provide an under-the-hood look at what Buffett’s company bought and sold in the most recent quarter. Meanwhile, Form 4 filings show buying and selling activity for positions in which Berkshire holds at least a 10% stake in a public company.
The Oracle of Omaha seemingly can’t get enough Occidental Petroleum
Last week, a Form 4 filing from Berkshire Hathaway showed that Buffett and his investing lieutenants, Ted Weschler and Todd Combs, have been active buyers of energy stock Occidental Petroleum (OXY). Between Oct. 23 and Oct. 25, Buffett and his team collectively purchased 3,921,835 shares of Occidental common stock at average price points ranging from $62.68 to $63.05.
Since the start of 2022, Buffett’s company has purchased more than 228 million shares of Occidental Petroleum at an estimated cost of around $11.2 billion, based on data provided by WhaleWisdom.com.
The Oracle of Omaha doesn’t casually put $11.2 billion to work in just any publicly traded company. The faith he’s shown in Occidental Petroleum as an investment likely boils down to three factors.
To start with, Buffett and his team surely believe the spot price for crude oil will remain elevated or further increase. Global energy companies have meaningfully reduced their capital expenditures since the COVID-19 pandemic began in 2020, which has led to tighter oil supply. To boot, Russia’s ongoing war with Ukraine creates uncertainties for Europe’s energy supply needs. Increasing worldwide oil supply could prove difficult, which bodes well for the spot price of crude oil.
Secondly, Occidental Petroleum’s operating structure allows it to disproportionately benefit from higher spot prices for crude oil. Although it’s an integrated energy company that also operates chemical plants, Occidental generates the bulk of its revenue from drilling. If the spot price of crude oil moves higher, Occidental’s operating cash flow will disproportionately benefit, relative to other integrated oil and gas companies. It should be noted that the reciprocal is also true — if the price of crude declines, Occidental’s cash flow will be hit harder than its peers.
The third lure for the Oracle of Omaha and his team has to do with the warrants Berkshire Hathaway holds for Occidental Petroleum common stock.
In 2019, Berkshire Hathaway handed over $10 billion to Occidental to facilitate its acquisition of Anadarko. In exchange, Buffett’s company received $10 billion worth of Occidental preferred stock, which yields 8% annually, as well as warrants to purchase up to 83,858,848 shares of Occidental common stock at an exercise price of $59.624 per share. It’s in Buffett’s best interest that Occidental common stock stays well above this exercise price.
Warren Buffett prefers buying this stock far more than Occidental Petroleum
Based on quarterly 13F filings and Form 4s, you’d probably assume Occidental Petroleum is Warren Buffett’s favorite stock to buy right now. However, dig a bit deeper and you’ll find another stock that’s commanding much more of Berkshire Hathaway’s available cash.
The catch is that you won’t find this stock listed in the company’s quarterly 13F, nor will there be any evidence of buying and selling activity via Form 4s. The only way to locate buying activity for what I’d deem Warren Buffett’s favorite stock is to peruse Berkshire Hathaway’s quarterly filings. That’s because Buffett’s top stock to buy is none other than shares of his own company, Berkshire Hathaway.
Whereas the Oracle of Omaha and his team have purchased roughly $11.2 billion worth of Occidental Petroleum shares since the start of 2022, Buffett and Executive Vice Chairman Charlie Munger have OK’d close to $14 billion worth of share buybacks over this same timeline. In fact, Buffett and Munger have overseen more than $71 billion worth of share repurchases since mid-July 2018, with buybacks occurring in all 20 quarters over the past five years (as of June 30, 2023). There isn’t a holding in Buffett’s portfolio that’s commanded this much capital.
There are a handful of reasons Warren Buffett strongly supports repurchasing shares of his company’s stock. For starters, share buybacks can make profitable businesses appear even more attractive to fundamentally focused investors. Since buybacks reduce the number of shares outstanding, businesses with steady or growing net income should enjoy a lift to their earnings per share.
Buffett also views buybacks as a means to reward his company’s long-term investors. With Berkshire Hathaway not paying a dividend, buying back stock and retiring shares over time is a way to increase the ownership stakes of the company’s existing investors. Just as Buffett touts Berkshire’s growing stake in Apple due to buybacks, he’s slowly but steadily increasing the ownership stakes of his shareholders in Berkshire over time.
The final reason Buffett has been piling into shares of his favorite stock is likely to demonstrate his conviction in the company he’s built over nearly six decades. Berkshire’s $326 billion investment portfolio, and the roughly five dozen businesses Berkshire owns, are predominantly cyclical. This means they’re ideally positioned to take advantage of long periods of expansion in the U.S. and global economy.
Even with Occidental Petroleum Form 4s rolling in on a somewhat regular basis, it’s crystal clear that Berkshire Hathaway tops Warren Buffett’s list of stocks to buy.
— Sean Williams
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Source: The Motley Fool