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 first quarter of 2022 — the quarter ending March 31 — 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.
Now, it might not make sense to piggyback on his trades and simply buy and/or sell whatever he has because these filings are generally released 45 days after the most recent quarter ended, but it would appear to be an intelligent move to investigate exactly where the most successful investor of all time is (and isn’t) putting his capital to work.
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!
Purchases
Purchased 3,787,856 shares of Apple Inc. (AAPL)
Purchased 8,969,420 shares of Ally Financial Inc. (ALLY) – NEW POSITION
Purchased 49,657,101 shares of Activision Blizzard, Inc. (ATVI)
Purchased 55,155,797 shares of Citigroup Inc. (C) – NEW POSITION
Purchased 7,880,998 shares of Celanese Corporation (CE) – NEW POSITION
Purchased 120,933,081 shares of Chevron Corporation (CVX)
Purchased 3,936,291 shares of Floor & Decor Holdings Inc. (FND)
Purchased 2,045,847 shares of General Motors Company (GM)
Purchased 104,476,035 shares of HP Inc. (HPQ) – NEW POSITION
Purchased 5,603,705 shares of Liberty Media Formula One Series C (FWONK)
Purchased 2,921,975 shares of McKesson Corporation (MCK) – NEW POSITION
Purchased 420,293 shares of Markel Corporation (MKL) – NEW POSITION
Purchased 353,453 shares of RH, Inc. (RH)
Purchased 136,373,000 shares of Occidental Petroleum Corporation (OXY) – NEW POSITION
Purchased 68,947,760 shares of Paramount Global Class B (PARA) – NEW POSITION
Sales
Sold 3,033,561 shares of AbbVie Inc. (ABBV) – SOLD OUT
Sold 5,202,674 shares of Bristol-Myers Squibb Co. (BMY) – SOLD OUT
Sold 3,427,647 shares of Kroger Co. (KR)
Sold 7,151,896 shares of Royalty Pharma plc (RPRX)
Sold 9,660,357 shares of Store Capital Corp. (STOR)
Sold 157,444,464 shares of Verizon Communications Inc. (VZ)
Sold 675,054 shares of Wells Fargo & Co. (WFC) – SOLD OUT
Purchases
Apple Inc. (AAPL) – Purchased 3,787,856 shares.
This purchase increases Berkshire Hathaway’s stake by 0.4%, which is now up to 890,923,410 shares.
Apple Inc. is a multinational technology company.
There’s no doubt about who was behind this move. The Apple investment is almost all Warren Buffett. And he came out and stated in this year’s Berkshire Hathaway annual shareholders’ meeting that he bought more Apple stock.
It’s really not a surprise. Buffett has stressed his affinity for Apple numerous times, going so far as to call it the best business he knows of. It’s by far the largest single position in the entire common stock portfolio. He really can’t get enough – especially when the stock is weak, as it has been over the last few months.
Indeed, Apple’s stock is down by more than 20% YTD. And Buffett is able to pounce when necessary.
Is it the absolute cheapest stock in the market? With a P/E ratio of 23.1, I would have to say no. However, you pay up for quality. And Apple gives you quality in spades.
That quality is partially evidenced by their reliable, rising dividend, which is funded by reliable, rising profit. Apple has increased its dividend for 11 consecutive years, with a five-year dividend growth rate of 9.2%. Between a very low payout ratio and one of the most robust balance sheets on the planet, I think there’s a lot more dividend growth where that came from.
I’ve called Apple a must-own stock for serious long-term dividend growth investors. It’s the biggest (by market cap) dividend growth stock in the world. It’s arguably the best, too.
If one doesn’t have any/enough Apple in their portfolio, it would be a worthwhile idea to consider following Buffett’s cue on this one and buying shares in one of the world’s most dominant and successful businesses.
Ally Financial Inc. (ALLY) – Purchased 8,969,420 shares.
This is a new position for Berkshire Hathaway.
Ally Financial Inc. is a bank holding company that provides a range of financial services.
The size of this position tells me that it’s highly unlikely that Buffett was behind it. Nonetheless, it’s still insightful. And it still impacts Berkshire Hathaway shareholders all the same.
Although it’s almost certainly Todd Combs or Ted Weschler behind the Ally buy, the transaction does feature Buffett’s DNA. And I say that for two reasons.
First, Buffett loves banks.
Second, Buffett loves value.
Speaking on the latter point, the stock is trading hands for a lowly P/E ratio of 4.8. It’s at book value right now. And it offers a nice yield of 3.1%. Those are Buffett-friendly numbers for sure.
What makes Ally particularly interesting for Berkshire Hathaway is that it’s a bit of a turnaround play. The bank was having trouble posting up consistent growth for the first part of the last decade. EPS went negative in FY 2013 and FY 2015. But Ally really started to turn it on since FY 2018. EPS has doubled over the last two years alone.
It remains to be seen whether or not Ally can be persistent with this. If they can, it’s an incredibly cheap bank. If they can’t, I would think the downside is still quite limited.
Meanwhile, Ally is buying back their stock and growing the dividend. Again, this is all right in Buffett’s wheelhouse, even if he probably didn’t actually pull the trigger on this idea. Regarding the growth of the dividend, Ally has increased its dividend for seven consecutive years, with a three-year dividend growth rate of 16.3%.
There’s actually little to dislike here. Ally offers value, yield, and growth. The quality is difficult to call, but the turnaround potential is real. It’s a very, very interesting move for Berkshire Hathaway.
Activision Blizzard, Inc. (ATVI) – Purchased 49,657,101 shares.
Berkshire Hathaway’s position is now up to 64,315,222 shares, which is an increase of 338.8% over the prior quarter.
Activision Blizzard, Inc. is an American video game and entertainment holding company.
Here’s what I said in last quarter’s update, when Berkshire Hathaway’s new position in Activision Blizzard was announced:
“This is move stands out to me. While the size of the transaction means it was likely Combs or Weschler behind it, this makes it no less interesting or impactful for Berkshire Hathaway shareholders.”
Why did it stand out? Well, I added this:
“…this is now a merger arb play for Berkshire Hathaway.”
Yes. Berkshire Hathaway does occasionally dive into the merger arbitrage space. And they decided to dive in even deeper here. While Buffett did acknowledge at this year’s Berkshire Hathaway annual shareholders’ meeting that it was, indeed, one of his investing lieutenants that initially bought the Activision Blizzard shares, he also stated that he decided to follow up on that and personally commit more of Berkshire Hathaway’s capital toward the idea.
That’s why the move this quarter is so much larger than the one we saw last quarter – Buffett simply controls much more capital within the portfolio.
Buffett also acknowledged that this is a straight-up merger arb play for Berkshire Hathaway. He’s confident it’ll close because the corporate suitor – Microsoft Corporation (MSFT) – has the cash to close the deal. It’s noteworthy that Microsoft’s deal to acquire Activision Blizzard values the latter at $95/share, which is well above the ~$78/share it’s currently trading at. Berkshire Hathaway stands to make a pretty penny if this deal closes.
Citigroup Inc. (C) – Purchased 55,155,797 shares.
This is a new position for Berkshire Hathaway.
Citigroup Inc. is a multinational investment bank and financial services corporation.
I see a lot in common between the aforementioned Ally investment and this investment in Citigroup.
Both are cheap banks that offer interesting turnaround potential.
The difference here, though, is that the opportunity is, perhaps, even better.
I say that for two reasons.
First, the stock is even cheaper. We’re talking about a P/B ratio of 0.6. It’s not even close to book value. That’s a depressed valuation that you might expect to see in a recession.
Second, Citigroup has been, in my view, even more consistent for a longer period of time. And it’s a much larger bank – about six times the market cap of Ally. Until very recently, it seemed like this bank just couldn’t post respectable numbers.
I can’t say if Berkshire Hathaway plans to be in this investment for long. As I’ve noted in prior updates, Buffett’s investing lieutenants both seem to be more active in terms of trading in and out of ideas. And based on the size of this investment, it seems likely that one of them made this move. Either way, it wouldn’t take much for Citigroup’s stock to at least get up to book value, which would still be cheap. A few more quarters of consistent growth, along with no major muck-ups, would go a long way toward restoring this once-great bank’s reputation.
I don’t personally see a lot to get excited about here for long-term dividend growth investors. But if you’re looking for a very cheap turnaround play in banking, Citigroup is a pretty obvious example.
Celanese Corporation (CE) – Purchased 7,880,998 shares.
This is a new position for Berkshire Hathaway.
Celanese Corporation is an American technology and specialty materials company.
I really like this move. Although I strongly doubt Buffett was behind it, it’s a very Buffett-like move.
Celanese is a great business, fundamentally speaking. Revenue is 33% higher than it was a decade ago. Free cash flow is about four times higher than it was 10 years ago. Annual net margin is twice as high as it was at the start of the last decade. The balance sheet is solid.
In terms of the fundamentals, there’s very little to complain about.
And then when you look at the valuation, you see undemanding multiples. The P/E ratio is 8.1. The P/CF ratio of 8.6 is well below its own five-year average of 10.7.
Also, Celanese has been reliably increasing its dividend for 12 consecutive years. The 10-year dividend growth rate is 27.5%. And the stock offers a fairly decent yield of 1.8%.
Lastly, you also get big buybacks here. Celanese has reduced its outstanding share count by 30% over the last decade.
This is one of those under-the-radar businesses that just consistently moves the needle higher. I’m confident that Buffett is happy about Berkshire Hathaway’s new exposure to Celanese.
Chevron Corporation (CVX) – Purchased 120,933,081 shares.
This addition brings Berkshire Hathaway’s position up to 159,178,117 shares, which is 316.2% higher over last quarter.
Chevron Corporation is an integrated global energy company, with exploration, production, and refining operations across the world.
There can be no doubt about who was behind the Chevron move. The position in Chevron is worth more than $26 billion. That’s firmly within Buffett’s capital realm.
Buffett has been all over oil & gas in 2022. Even as these stocks have gone on huge runs, Buffett decided to buy more. If you zoom out, it might look like Berkshire Hathaway is buying into a commodity bubble. However, I’d argue against that. I think there are three structural advantages that these major energy companies now have (that they didn’t have only a few years ago).
One, we have high prices that can’t be cured quickly. That’s because of longstanding underinvestment in traditional energy supply for years. Because the lack of investment in supply has been going on for so long, this current imbalance between supply and demand can’t be fixed quickly.
Two, we have a more favorable operational environment for these companies. There was a lot of hostility and vitriol being thrown the way of supermajors like Chevron over the last few years. With supply now a problem, politicians and money managers have suddenly warmed up to hydrocarbon companies .
Three, these companies are leaner and meaner. They had to become more focused and disciplined with their capital allocation, favoring shareholder returns over chasing growth projects that were at risk of being stranded. While that dynamic could change, I think eyes in the industry have been opened to the success that can be had when capital allocation is more disciplined.
Chevron’s stock is up a jaw-dropping 41% this year, even while the S&P 500 is down nearly 20% over the same time frame. That’s an incredible divergence for a company (and stock) that had been derided for years.
The crazy thing is, there could be a lot more to come. And Buffett is clearly betting on that in a big way. I’d usually be cautious about going so heavy after a big upward move like this, but I also think Chevron (and its ilk) will benefit from huge changes in the entire energy complex.
It should also be noted that this stock started off its incredible run at a fairly innocuous valuation. You might say that its years of undervaluation that’s finally catching up to the stock here, as a coiled spring can only stay coiled for so long before finally explosively uncoiling. Even after the run, the P/E ratio is at only 15.8. That’s not particularly high.
Meanwhile, Chevron’s stock offers a market-smashing 3.4% yield. And this is a dividend that’s been increased for 35 consecutive years. Even when oil pricing went negative for a short period in 2020, Chevron didn’t cut the dividend. If that doesn’t speak volumes about their commitment to the dividend and their shareholders, I don’t know what will.
Buffett is betting big on oil. He could be very right.
Floor & Decor Holdings Inc. (FND) – Purchased 3,936,291 shares.
This purchase increased Berkshire Hathaway’s stake by 466.5%, which is now up to 4,780,000 shares.
Floor & Decor Holdings Inc. is an American specialty retailer of hard surface flooring and related accessories.
This was a big increase in the position in percentage terms, but the overall position is still quite tiny by Berkshire Hathaway standards. It’s worth a bit more than $300 million right now, which is a rounding error for the firm. So it’s highly unlikely that Buffett had anything to do with it.
This stock has been a disaster this year. It’s down 47% YTD. That’s a big move down.
However, we all know that Buffett loves to be greedy when others are fearful. All else equal, if you like a stock at $X, you should like it even more at less than $X.
Well, it’s clear that Berkshire likes what it sees here. They averaged down big in the first quarter of this year. The stock is down heavily again in Q2, so they could be buying more as we speak. We’ll know when the next 13F filing comes out.
Either way, this business has put up really impressive growth over the last 10 years. Revenue is up 10x. EPS is up 20x. Huge, huge growth.
Profitability has also expanded in a meaningful way. And the balance sheet is strong.
The stock isn’t super cheap. Even after the drop, the P/E ratio is north of 26. But relative to the proven growth, that is not a high earnings multiple at all.
It remains to be seen what happens with in housing and construction as we move forward. It’s been gangbusters there over the last two years. That will cool, and it has been cooling. But the stock has also cooled in a major way, which prices in a lot of slowdown.
The company doesn’t pay a dividend, which makes it uninteresting for me. But for one of Buffett’s lieutenants, I can see why they’d really like this business here.
General Motors Company (GM) – Purchased 2,045,847 shares.
Berkshire Hathaway brought this position up to 62,045,847 shares, which is 3.4% higher over last quarter.
General Motors Company is a multinational automotive manufacturing corporation.
The General Motors position is rather old, dating back about 10 years for Berkshire Hathaway. And it’s also somewhat large – worth over $2.2 billion here. It does appear to have Buffett’s fingerprints on it.
The stock took a hard tumble in Q1, which is likely what prompted Berkshire Hathaway to increase the position. It’s since tumbled even more in this quarter, and it’s now down 42% YTD.
That’s led to a very cheap valuation, which is obviously right up Buffett’s alley.
We’re talking about a P/E ratio of 6.0 here. The P/CF ratio is a lowly 3.3. The stock is practically being given away at this point.
But does it deserve this low valuation?
That’s an interesting question. After all, the business has been stuck in the mud for years. I see no sustained growth in any part of the business. And that’s probably owed to the fact that this industry is just brutally competitive. The car industry is a very, very difficult industry. And with the rise of EVs, it’s only getting more competitive and difficult.
I’ve never owned GM stock in my life. As a dividend growth investor who likes to invest in high-quality companies that will reliably pay me ever-larger dividends, I always saw GM as an unreliable investment in this regard. Indeed, GM eliminated their dividend altogether during the pandemic, which came after a static payout for a number of years.
GM is cheap. But I’d go out on a limb and say it deserves to be cheap.
Now, the market could certainly bump up the valuation from these ludicrously low levels. And so Berkshire Hathaway could stand to make some money from a rerating. But I don’t see a lot to like for long-term investors who want to be in quality businesses that can pay reliable, rising dividends through thick and thin.
HP Inc. (HPQ) – Purchased 104,476,035 shares.
This is a new position for Berkshire Hathaway.
HP Inc. is a multinational information technology company that develops personal computers, printers and related supplies, as well as 3D printing solutions.
This was a fairly big splash for Berkshire Hathaway. The position is worth over $4 billion. Berkshire Hathaway owns more than 10% of the entire company. I didn’t hear Buffett specifically note at this year’s meeting whether or not he made this move, but I’d venture a guess that he was the one who pulled the trigger here. I base that assumption on the size of the investment, as well as the investment type itself.
There’s a misnomer that Buffett doesn’t like to invest in tech. Yet Berkshire Hathaway’s single largest position in the common stock portfolio is a tech company. Buffett does like tech.
Now, I’ve witnessed a lot of arguments about whether the HP move is more like Buffett’s ill-fated play on IBM or his highly successful investment in Apple.
I’d argue it’s both. And yet neither.
I say that because HP is a tech company. So it does have that in common with both IBM and Apple.
However, HP doesn’t have the growth challenges that have plagued IBM for years. It’s in totally different areas of technology.
All the same, it’s not the fast-growing, world-class business that Apple is.
I think HP offers more growth potential than IBM did, but it’s also far cheaper than Apple. It’s a compromise in some ways.
After splitting up Hewlett-Packard 2015, HP has produced good growth. Revenue is ~31% higher than it was in FY 2016. EPS has nearly tripled.
You also see a lot of that growth in the dividend. The company has increased its dividend for 12 consecutive years, with a 10-year dividend growth rate of 15.2%. And the stock even offers a compelling yield of 2.7%.
What really may have grabbed Berkshire Hathaway’s attention, though, is the cheapness.
The stock’s P/E ratio is only 6.6. Every basic valuation metric is well off of its respective recent historical average. Low expectations are being baked in here. And as Buffett has said before, he’d rather step over one-foot bars than jump over seven-foot bars. This is an easy move, in my view.
If you’re looking for a cheap way to play tech, especially legacy tech, HP is very interesting here. It should also be noted that the stock has held up very well this year – down only 3% YTD.
McKesson Corporation (MCK) – Purchased 2,921,975 shares.
This is a new position for Berkshire Hathaway.
McKesson Company is an American company distributing pharmaceuticals, medical supplies, and care management tools.
This position is worth less than $1 billion for Berkshire Hathaway, which tells me that Buffett probably was not involved.
McKesson is a massive company. They do over $260 billion in annual sales. There’s a lot of business in the distribution of healthcare products across America.
That’s the good.
The bad?
It’s a business model with razor-thin margins. McKesson’s net margin came in at less than 1% last fiscal year. Actually, way less than 1%.
Distributors like McKesson must do business in big volumes. Otherwise, there’s little profit to be had.
I also take issue with the lack of growth.
McKesson has grown its top line pretty consistently over the last decade. The bottom line has been far more spotty. Net income has barely moved. It’s only share buybacks that have caused EPS to increase.
I also dislike the pittance for yield. The stock’s yield of 0.6% doesn’t exactly excite me.
All that said, the valuation doesn’t require a stretch at all – even after the stock’s 61% surge over the last year.
The P/S ratio, for instance, is only 0.2. You’re paying a very low price for very high volumes.
Berkshire Hathaway doesn’t usually buy after a big run. But they must still see a disconnect here between price and value. McKesson remains a critical part of the US. health infrastructure, but they’re not assigned a very high valuation for that critical nature. That must have factored into Berkshire Hathaway’s calculus.
Markel Corporation (MKL) – Purchased 420,293 shares.
This is a new position for Berkshire Hathaway.
Markel Corporation is a holding company for insurance, reinsurance, and investment operations.
This is a very interesting investment for Berkshire Hathaway to make. Markel has referred to as a miniature Berkshire Hathaway, as it has insurance and reinsurance operations where excess capital is allocated similarly to Berkshire Hathaway. Markel’s chief investment officer, Tom Gayner, has been compared to Warren Buffett. Gayner has built up a sizable equity portfolio for Markel, much like how Berkshire Hathaway has invested its float into a variety of equities.
Since the Markel investment is well under $1 billion, it was almost certainly Combs or Weschler behind the move. But I doubt that makes Gayner and his team any less pleased with getting this seal of approval from Berkshire Hathaway.
Speaking on Markel, they’ve done a great job of growing the business. Revenue has been quadrupled over the last decade, while EPS has quintupled over that period. Book value per share has more than doubled over the last 10 years. Better yet, this growth has been fairly consistent. The firm should be proud of their track record.
And Markel’s valuation is not egregious at all. The current P/B ratio is slightly under its own five-year average of 1.5. The P/E ratio is 10.6. You’re not paying much for the quality, consistency, and growth.
Berkshire Hathaway likely sees a smaller version of itself in Markel. They operate similarly. Because Markel is much smaller (its market cap is a small fraction of Berkshire Hathaway’s), its growth potential isn’t quite as limited by the law of large numbers. I think this investment makes a lot of sense for Berkshire Hathaway.
Like Berkshire Hathaway, Markel doesn’t pay a dividend. As a dividend growth investor, it doesn’t make sense for me. But Berkshire Hathaway shareholders should be happy with this move. It’s Berkshire Hathaway doubling down on what they know and what works.
RH, Inc. (RH) – Purchased 353,453 shares.
This addition increased the position by 19.5%, which is now up to 2,170,000 shares.
RH, Inc. is an upscale home furnishings retailer.
RH runs one of the best businesses in all of home furnishings. They’ve long had some of the highest-quality and most sought-after home products; however, they did, at times, have issues converting that cachet into consistent profits.
It appears that the business turned the corner sometime around 2019, which was just in time for the pandemic and all of the increased demand that came RH’s way. RH went from posting up negative EPS in FY 2013 to putting up $5.12 in EPS for FY 2019.
This advantageous positioning, along with a sudden surge in demand, sent the stock skyrocketing more than 700% from its 2020 pandemic lows. A huge ride if you can jump in at the right time.
But what goes up must come down? The momentum has turned against RH. The stock is now down 65% from its 52-week high, which is a stunning fall.
Berkshire Hathaway is stepping in and buying the drop. What’s interesting is that this stock is down another 20% from where it ended Q1, so I’ll be keen to see if Berkshire Hathaway bought more RH during Q2.
Either way, Combs or Weschler are jumping all over RH. And I really can’t blame them. The tide has temporary gone against RH, but I’d argue that it has unrivaled brand recognition and pricing power. If you’ve got the money, I can’t think of better products to furnish a home with.
Now, the valuation did get a little ridiculous when RH jumped to nearly $750/share. It seemed like the market was pricing in a perpetual pandemic. But down here at around $260/share? I think the business’s valuation is much more acceptable. The stock is nearly back to its pre-pandemic pricing, which would value everything that’s occurred over the last two years at nearly $0.
The stock’s P/E ratio of 11.9 is super low for a business of this stature, but we’ll have to see what happens to the E in the P/E ratio between now and the next year or so. A pull-forward in demand, an increase in rates, and a cooling housing market all portend a drop in RH’s near-term EPS. Perhaps a significant drop.
But if you’re in this for the long term, as Berkshire Hathaway usually is, I think RH will do fantastic for its shareholders. The stock pays no dividend, so it doesn’t work for me. But if you’re not after a dividend, or if you’re a Berkshire Hathaway shareholder, RH looks compelling to me after the 65% fall has priced in far lower expectations on a go-forward basis.
Occidental Petroleum Corporation (OXY) – Purchased 136,373,000 shares.
This is a new position for Berkshire Hathaway.
Occidental Petroleum Corporation is an international energy company involved in hydrocarbon exploration and production.
I think almost everything I said about Chevron earlier can also apply to Berkshire’s big move into Occidental. Buffett is behind both moves for the same reasons behind the structural imbalance between supply and demand in global energy, as well as the advantageous paradigm shift that’s occurred for traditional energy companies.
Buffett is betting on a sustained move higher for oil prices. And I think he’ll turn out correct on that. Demand may get destroyed to some degree in the near term – the cure for high prices is high prices, as the saying goes. However, supply is the bigger issue here, and I think that’s going to remain a problem for a long time.
Paramount Global Class B (PARA) – Purchased 68,947,760 shares.
This is a new position for Berkshire Hathaway.
Paramount Global is a multinational mass media and entertainment conglomerate.
Berkshire Hathaway jumped in big on this one, putting more than $2 billion to work here with Paramount Global.
If there’s a word that comes to mind when looking at Paramount Global, it’s “cheap”.
The business is just plain cheap across the board. And Berkshire Hathaway has been known to like cheap stocks, especially when you get quality along with it.
The P/E ratio is 5.3. This stock never commands a high earnings multiple, but its five-year average P/E ratio of 12.1 is well above this number. Every single basic valuation metric I look at is substantially lower than its respective recent historical average. Very low expectations are being embedded into this valuation. That’s really the big story here.
The other thing that comes to mind here, albeit less so than the cheapness, is the fact that Paramount sometimes gets falsely lumped into the make-it-or-break-it streaming narrative after the launch of Paramount+. But the company is also in broadcasting (through its major broadcasting network in CBS), which includes highly valuable sports rights. And they have one of America’s major film studios in Paramount.
Paramount is a media conglomerate with a streaming business, not a straight-up streaming business.
All that said, there is a lot riding on the streaming platform. And there are more questions than answers regarding this company’s future in streaming, as well as the future of media, in general.
But I think a lot of those questions can be indirectly answered with the aforementioned cheapness.
Is there uncertainty here? Absolutely.
Is a ton of uncertainty already being priced in? I’d argue so.
Buffett has been known to like media businesses very much, and he has a storied history with media institutions ranging from the Washington Post to Capital Cities to various local newspapers. The Paramount Global investment is not at all out of character for Berkshire Hathaway. And I think the low expectations embedded in the valuation introduce a nice margin of safety.
Sales
AbbVie Inc. (ABBV) – Sold 3,033,561 shares shares.
Berkshire Hathaway completely sold out of this position.
AbbVie Inc. is a global pharmaceutical company with a particular focus on immunology and oncology.
This isn’t a surprise. Berkshire Hathaway has been telegraphing this move for months, slowly selling out of AbbVie and a variety of its other holdings in Big Pharma.
Personally, I think this is a mistake. In my view, Big Pharma fits Berkshire Hathaway to a tee. You get low valuations, secular growth from favorable demographic trends, inelastic demand, and great dividends.
I’m really not quite sure why Berkshire Hathaway soured on its Big Pharma investments, particularly since that souring started to occur not long after these investments were initially made. It wasn’t just the changing of the mind that’s surprised me. It’s also the speed at which it occurred.
My best guess regarding these sales comes down to capital allocation. We know that Combs and Weschler manage a relatively small portion of the portfolio’s capital. Buffett still controls the lion’s share of that capital. So it could have simply been a case where one of the managers saw better opportunities for the limited capital on a relative basis. Even Berkshire Hathaway has limits.
Personally, I still believe that Big Pharma, in general, is ripe for investment over the long haul. That’s especially true for dividend growth investors.
Speaking on AbbVie specifically, management has done everything possible to balance blockbuster drug Humira against the inevitable patent cliff that accompanies such a blockbuster drug. The company’s $63 billion acquisition of Allergan greatly helped to improve the breadth of the combined enterprise and lead to record revenue, EPS, and free cash flow in FY 2021. All AbbVie seems to do is grow like crazy.
That also translates over to the dividend. The company has increased its dividend for 10 consecutive years, which dates back to its separation into an independent company from former parent company Abbott Laboratories (ABT). The five-year dividend growth rate is 13.1%. And the stock even offers a juicy yield of 3.7%.
Most basic valuation metrics are basically within a close range of their respective recent historical averages, including the current P/E ratio of 21.9 (compared to its five-year average of 25.4). I don’t think AbbVie is undervalued. But I also don’t think it’s all that expensive. It’s certainly not something I’d be dumping right now.
I’ve been on the opposite side of this idea from Berkshire Hathaway ever since they started unloading these stocks. And they’ve performed well while Berkshire Hathaway has been selling – ABBV is up nearly 13% YTD. I think these businesses, and their stocks, will continue to do well for years to come.
Bristol-Myers Squibb Co. (BMY) – Sold 5,202,674 shares.
Berkshire Hathaway completely sold out of this position.
Bristol-Myers Squibb Co. is a pharmaceutical company that manufactures treatments in several areas, including cancer, HIV/AIDS, cardiovascular disease, diabetes, hepatitis, rheumatoid arthritis and psychiatric disorders.
As with AbbVie, this isn’t a surprise. It’s the culmination of a process that’s been playing out over numerous quarters. Berkshire Hathaway bought a mix of companies within Big Pharma in one fell swoop, and then they quickly started to sell out of those holdings en masse.
Everything I just noted about AbbVie could also be said about Bristol-Myers Squibb. I think these are both great businesses to hold for the long run. The big difference between ABBV and BMY is that BMY has been an even stronger performer in 2022 – it’s up 25% YTD.
I wouldn’t be loading up on BMY here. The valuation isn’t as compelling as it was a few months ago. Most basic valuation metrics are very close to their respective recent historical averages.
On the other hand, I’m also not super enthusiastic about the idea of selling this name. The stock has simply gone from cheap to what looks more like a fair valuation, and I think that’s worth holding onto for the long run.
Kroger Co. (KR) – Sold 3,427,647 shares.
This sale reduced Berkshire Hathaway’s stake by 5.6%, now down to 57,985,263 shares.
Kroger Co. is a retail company that mainly operates supermarkets throughout the United States.
This move follows up a much smaller sale of 375,000 shares in the prior quarter. So it’s two sales in a row. And it’s, notably, an acceleration in the selling – this quarter’s sale size was nearly ten times that of last quarter’s sale size.
I’m obviously not exactly sure what prompted Berkshire Hathaway to start moving out of its Kroger position. What I can say, though, is that Kroger’s stock has been pretty strong recently – it’s up 6% YTD, while the S&P 500 is approaching a bear market. That’s a significant amount of relative outperformance.
However, at least some of that outperformance has come at the expense of a multiple expansion. The stock’s valuation is now somewhat rich. Every basic valuation metric I look at shows this. The P/E ratio of 22.0 is well above its own five-year average of 14.1. And the P/CF ratio of 5.8 is slightly ahead of its own five-year average of 5.6. Even the current yield of 1.8% is below its own five-year average of 1.9%. Nothing indicates undervaluation, yet everything indicates at least modest overvaluation.
Kroger is running a very good supermarket business. Revenue, EPS, and free cash flow are all up meaningfully over the last decade. The balance sheet could be improved but is still good. Margins are very thin, but that’s to be expected for the business model.
I’m assuming that Berkshire Hathaway is making a portfolio management/capital allocation call here on Kroger, seeing a strong performer with a rich valuation in a market full of poor performers and weak valuations.
I do like Kroger. They’ve increased the dividend for 16 consecutive years, with a 10-year dividend growth rate of 13.8%. They routinely buy back shares. It’s a shareholder-friendly business. Between the thin margins and the elevated valuation, however, I’m on the sidelines here.
Royalty Pharma plc (RPRX) – Sold 7,151,896 shares.
This sale dropped Berkshire Hathaway’s position down to 1,496,372 shares, which is 82.7% lower than the prior quarter.
Royalty Pharma plc is the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry.
Berkshire Hathaway sold shares in AbbVie, Bristol-Myers Squibb, and Royalty Pharma last quarter. And they’re clearly back at it again this quarter. I guess the only surprise for me is that they didn’t completely sell out of Royalty Pharma alongside AbbVie and Bristol-Myers Squibb.
This is really part of a theme that’s been playing out for several quarters, where Berkshire Hathaway has been selling out of its exposure to Big Pharma. I’m not quite sure why they decided to do that, but that’s the course they set out on some time ago.
Royalty Pharma does strike me as different from AbbVie and Bristol-Myers Squibb, however.
Here’s what I said when Berkshire initiated their position in Royalty Pharma in Q3 last year:
“The company only went public in June of last year. With such a limited history as a public company, and little financial information to go off of before they went public, I’m not real sure what to make of the business.”
Indeed, I’m sticking to that line of thought. I’m not real sure what motivated Berkshire Hathaway to invest in the first place. And I’m even more perplexed about their quick about-face.
Store Capital Corp. (STOR) – Sold 9,660,357 shares.
This sale pared Berkshire Hathaway’s position by 39.6%, which now stands at 14,754,811 shares.
Store Capital Corp. is a net lease real estate investment trust.
This sale does surprise me. I think Store Capital has run its business very well for years, and they performed admirably throughout the pandemic.
Despite being in real estate, which was hit hard with uncertainty and even outright closures throughout the pandemic, Store Capital collected a high percentage of their rent and – most importantly – never cut the dividend. That shows a deep level of respect for and commitment to the shareholders, which I can appreciate. And it also shows a great business model that was able to overcome what might be the most difficult challenge it could ever see.
Store Capital grows its FFO/share and dividend at a mid-single-digit, year in and year out, like clockwork. Speaking of the dividend growth, the dividend has been increased for seven consecutive years (dating back to its 2014 IPO), with a five-year dividend growth rate of 5.9%. And the stock offers a 5.8% yield.
Not huge growth. Not huge excitement. But it’s a steady-eddy play on American commercial real estate, in my opinion.
Meantime, Store Capital is almost priced for disaster at this point. It’s P/CF ratio of 11.7 is substantially lower than its own five-year average of 16.2.
Berkshire Hathaway isn’t known for investing in REITs. So their stake in Store Capital has always stood out. However, I am taken aback by the decision to get out now.
Based on the financials, the business is doing well. Despite that, the stock has been hammered this year. Berkshire Hathaway is usually a buyer, not a seller, when there’s a favorable disconnect between business performance and stock performance. If one were to want to get out of Store Capital, almost all of 2021 would have been a better time to do that. And so I see Store Capital as more worthy of buying, not selling, right now – with the caveat that many areas of commercial real estate are still feeling lingering effects from the pandemic.
Verizon Communications Inc. (VZ) – Sold 157,444,464 shares.
This sale reduced Berkshire Hathaway’s position down to 1,380,111 shares, which is a 99.1% drop from the prior quarter.
Verizon Communications Inc. is a multinational telecommunications conglomerate.
We should have little doubt about who made this call. It was Buffett. This was a fairly large position within Berkshire Hathaway’s common stock portfolio. Large enough to all but guarantee that Buffett masterminded both getting in and getting out of Verizon. I guess the only strange thing here is that Berkshire Hathaway didn’t completely sell out. Perhaps they simply ran out of time during the quarter. In that case, we should expect that this position will be completely exited during Q2.
This is another sale that does perplex me somewhat. Now, the fact that Berkshire Hathaway had such a large position in Verizon in the first place did kind of catch me off guard. Last I looked, before this sale, the position was worth north of $7 billion. That’s a big commitment to a slow-growth telecom.
I think Verizon is a nice income play. But the business only grows at a low-single-digit rate per year. I was never all that confident that this was going to be enough to satisfy Buffett, especially at that scale. In my view, Verizon makes more sense as a smaller holding within an income-oriented portfolio. Buffett, on the other hand, is really on the clock in terms of performance. And Verizon simply isn’t a big performer in the total return sense.
However, Verizon has had a decent slide of 7% this year. It’s definitely done better than the S&P 500, which does argue against what I just said about performance, but the drop came from a level that wasn’t all that high from the start. And so it’s a cheap stock that, in my opinion, only got cheaper.
Take that big 5.2% yield, for example. If we use that as a marker, we can compare that against the stock’s own five-year average yield of 4.3%. Nearly 100 basis points of spread here. That’s huge. By the way, the stock is trading hands for a P/E ratio below 10. Nothing demanding about this valuation.
With a yield that blows away what the market gives you and reliable ~2% annual raises to the dividend, I see Verizon as a cheap, solid income play here. It won’t make you rich overnight. But if you want a dependable dividend that gets increased at a modest rate per year, Verizon doesn’t strike me as a bad idea at all. I just wouldn’t go in as heavy as Buffett did.
Wells Fargo & Co. (WFC) – Sold 675,054 shares.
Berkshire Hathaway completely sold out of this position.
Wells Fargo & Co. is a multinational financial services company.
Well, this sale marks the end of an era. Buffett’s investment in Wells Fargo dates back decades. He really was a long-term investor in Wells Fargo. That kind of behavior is usually richly rewarded. Unfortunately, in this case, it wasn’t.
Buffett has been telegraphing his decision to move out of Wells Fargo for a long time. Buffett’s patience is legendary. But Wells Fargo had one mismanagement issue after another, and even Buffett finally saw his patience run thin.
The only thing that could perhaps be criticized here is the fact that Buffett didn’t get out sooner. It’s been clear for a long time that something is wrong with this bank. The bank was better 10 years ago in almost every way possible. However, to be fair to Buffett, Berkshire Hathaway had a massive position in Wells Fargo. It does take time to unwind that.
Wells Fargo could be a solid turnaround play for the right investor. But the valuation doesn’t seem to imply that kind of potential in terms of a value unlock. The stock’s P/B ratio is at 1.0. Quite a few banks – banks performing far better than Wells Fargo – are selling for similar multiples of book value right now. It seems like the poor operational performance and execution risk is not being properly priced in here. I would expect this stock to be cheaper.
Regardless, the valuation is a moot point. So is everything else around Wells Fargo at this juncture. Buffett decided to sell out a long time ago. This last tranche of shares represents only a remnant of what was once a large and successful investment. With Wells Fargo neither cheap nor operationally superior, I see little to like in comparison to almost any other large bank in America.
— Jason Fieber
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