In 1965, Warren Buffett became CEO of Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ). Over the past 58 years, he has done little more than double the annualized total return of the S&P 500 (19.8% vs. 9.9% as of Dec. 31, 2022) and oversee the total return of his company's Class A shares ( BRK. A ) more than 4,400,000% from the closing bell on August 9, 2023. It is these numbers that encourage nearly 40,000 people a year to make the trip to Omaha, Nebraska to hear his wise counsel from the Oracle of Omaha.
Fortunately, Warren Buffett and Berkshire Hathaway are open books. Buffett was more than willing to share what he looks for in investments. Likewise, investors have access to filings with the Securities and Exchange Commission (SEC) that detail every nook and cranny or what makes Berkshire Hathaway tick.
One such filing, Form 13F, is particularly useful for investors. The 13F is a mandatory quarterly filing for money managers with at least $100 million in assets under management. It provides an overview of what was bought, sold and held in the last quarter. For investors looking to mirror the Oracle of Omaha's trades, the 13F is invaluable.
Although Berkshire's 13F is due out after the closing bell today (Monday, Aug. 14), investors don't have to wait for its release to learn about some of the moves Warren Buffett made during the second quarter. Based on an assortment of SEC filings, it's easy to see that Buffett is buying two stocks while surprisingly reducing another top holding.
#1 Stock Warren Buffett Can't Stop Buying: Berkshire Hathaway
For all the hype surrounding Berkshire Hathaway's largest holding, Apple, which accounts for 45% of invested assets, there is no stock in which Buffett and his team have invested more money over the past five years than their own company, Berkshire Hathaway.
At the end of each Berkshire Hathaway quarterly report, the company details its share repurchase activity. In the June quarter, Warren Buffett and well-known aide Charlie Munger oversaw the buyback of 1,042 Class A shares and 2,354,444 Class B shares ( BRK.B ), equating to a market value of just over $1.3 billion. Berkshire Hathaway repurchased its own shares for the 20th quarter in a row. More impressively, Buffett and Munger have spent a combined total of more than $71 billion on buybacks since July 2018. If you're wondering why Buffett put more than $71 billion of his company's cash into buying his own stock, there are three good reasons.
For starters, it's Warren Buffett's way of rewarding his company's long-term shareholders. Although Berkshire does not pay dividends, the disposal of shares through buybacks and the reduction of outstanding shares makes existing investors larger shareholders in the company.
A second catalyst for Berkshire Hathaway's aggressive share buyback activity is that it has a positive impact on the company's earnings per share (EPS). Businesses like Berkshire that have stable or growing net income often enjoy an increase in EPS as the number of shares outstanding declines over time. In other words, Berkshire Hathaway stock is more attractive to fundamentally-focused investors.
Finally, the more than $71 billion in cumulative buybacks since July 2018 may symbolize Warren Buffett and Charlie Munger's faith in the company they've built. Berkshire Hathaway has a solid foundation of branded cyclical businesses that it owns and invests in that should have no problem growing their sales and earnings over the long term.
Stock #2 Warren Buffett Can't Stop Buying: Occidental Petroleum
The second stock that Warren Buffett and his investment lieutenants Ted Weschler and Todd Combs have been buying is the energy company Occidental Petroleum.Because Berkshire Hathaway owns a double-digit percentage stake in Occidental, a Form 4 must be filed with the SEC every time it buys or sells stock. These Form 4s mean investors don't have to wait until the next 13F round to find out what the Oracle of Omaha and his team are up to.
As of early 2022, Buffett and his investment lieutenants have expanded Berkshire's common stock position in Occidental Petroleum from 0 shares to north of 224.1 million shares. This includes more purchases during the second quarter of 2023.
The most likely reason why Buffett and Co. more than $14 billion in Occidental's common stock, is the belief that the spot price of West Texas Intermediate (WTI) crude will remain elevated. This thesis is supported by more than three years of capital underinvestment from the world's major energy companies due to pandemic uncertainty. In addition, Russia's ongoing war with Ukraine is clouding Europe's energy supply needs. As long as global oil supply remains tight, there is good reason to expect upward pressure on the WTI price.
While most oil stocks benefit from a higher WTI or Brent spot price, Occidental Petroleum has a big advantage. Although Occidental is an integrated operator with downstream chemical plants, it generates most of its revenue from wells. Simply put, its operating cash flow is much more affected by fluctuations in the WTI spot price than its peers. Occidental Petroleum raised its quarterly payout by 38% earlier this year and also implemented a $3 billion share buyback program. Warren Buffett loves businesses with healthy capital return programs.
But you might be surprised to learn that Buffett and his team have been net sellers of the stock since October 2022. In the nine-month period ending in June, Berkshire Hathaway sold $33.03 billion more than it bought. One stock that makes up a significant portion of that $33 billion in net sales is integrated oil giant Chevron.
Based on Berkshire Hathaway's mid-May 13F, the company owned 132,407,595 shares of Chevron. As of June 30 (the date Berkshire's second quarter ended), these shares should have had a market value of around $20.8 billion. However, in Berkshire Hathaway's second quarter report, Chevron represented only $19.4 billion in aggregate fair value. It would appear that Buffett and team further reduced Berkshire's stake in Chevron by more than $1 billion during the second quarter. This continued reduction in Chevron is certainly a surprise and something of a scratch, especially when you consider that Berkshire Hathaway has been gradually increasing its stake in Occidental Petroleum since early 2022.
In comparison, Chevron is substantially more diversified than Occidental. Although both are integrated operators, Chevron's transportation pipelines, chemical plants and refineries help it hedge against potential declines in WTI and Brent prices much better than Occidental Petroleum.
Likewise, Chevron's balance sheet is significantly more promising than Occidental's. The increase in operating cash flow over the past two years has helped Chevron substantially reduce its net debt. Although Occidental has reduced its net debt by more than $15 billion over two years, it is still digging out of a net debt hole of nearly $19.7 billion as of June 30.Perhaps the best explanation for why the Oracle of Omaha and his team continue to choose Occidental over Chevron is the guarantees that Berkshire has on Occidental.
When Occidental acquired Anadarko in 2019, Buffett's company provided the former with $10 billion to facilitate the transaction. In exchange, Berkshire Hathaway received $10 billion in Occidental preferred stock with an annual yield of 8%, as well as warrants for 83,858,848 Occidental shares exercisable at $59.624 per share. It is in Buffett's best interest that Occidental's stock price remain well above this strike price.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.
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