Keeping up with “The Oracle of Omaha”
The legendary Warren Buffett is no stranger to having his portfolio moves analyzed inside and out. The Berkshire Hathaway Chairman and CEO just celebrated his 90th birthday by announcing stakes in five different Japanese conglomerates. This comes after legal filings a couple of weeks ago indicating other major portfolio moves worth diving into.
Why does Buffett own so much Apple?
- Apple (AAPL) is interesting, given it’s so synonymous with “tech company,” but really it’s more of a consumer goods company, something Buffett is more familiar with. Buffett has always stated that he loves when companies he owns buy back their own shares—basically he can sit back and relax and benefit from his position increasing. Apple has done that on a large scale and been an incredible performer (especially in comparison to other holdings). I believe that combination leads to AAPL comprising such a large part of the portfolio. Interestingly, Berkshire hasn’t actually added meaningfully to Apple since Q1 2018. In fact, they have been selling more than anything, with over 4 million shares sold in 2019.
Buffett’s move into gold-mining stocks
- Buffett’s historical anti-gold mentality is getting a lot of attention as a result of the recent purchase into Barrick Gold (GOLD). I think it’s an overreaction. It’s a very tiny purchase in the scheme of things—0.278% of Berkshire’s total portfolio. I also think the position fits into Buffett’s long-term thought process. GOLD trades at attractive valuations relative to peers and has one of the highest (as expected) returns on equity, as well as a stronger balance sheet than most miners. It’s also the second largest by market cap, something Berkshire undoubtedly needs to account for, given the size of their available capital and the small size of the gold mining industry.
Trimming and eliminating financials
- This is actually more of a question mark to me than gold miners and Apple, but I think there are some nuances. Financials definitely face profitability issues. Wells Fargo continues to be a black eye but selling some of the best-of-breed banks and regionals, such as JP Morgan, Goldman, and US Bancorp, is intriguing. What has been underreported? Berkshire has added 107,843,406 shares to Bank of America Corporation since the Q2 13F filing—that is $2.7 billion. It may not offset the total sells, but it is compelling enough to keep an eye on.
Blowing out newspapers and airlines
- Newspapers were another head scratcher, at least on the surface. Buffett sold the newspaper business to Lee Enterprises, a company he’s said is the only one he could trust to run the newspapers. Lee, however, is also in financial trouble. Berkshire is “selling” to them, but also swooping in to their rescue with a $576 million loan to help refinance long-term debt and keep them afloat. Essentially, he’s breaking even on the deal versus when he purchased in 2012. But like any deal Buffett makes, he’s thinking of shareholders—that debt is a 25-year loan at 9% interest! A pretty good swap.
- Airlines, to me, feel like a Tedd and Todd action/decision. 1) Warren has stated he doesn’t like the business model, although that doesn’t preclude them from owning; 2) Based on the time frame of ownership, it seems pretty unusual for Warren to buy high and sell low. At the same time, however, if they thought the recovery in airlines would take longer than expected and wanted to deploy money elsewhere, getting out would be a good idea.
- Both newspapers and airlines fit into the self-deprecating and not-afraid-to-admit-defeat nature of Buffett. I think sometimes that’s viewed as a weakness, but, in fact, could be a big reason for his long-term mega success. His holding period is “forever” but he has exited some high profile positions in the past: Salomon Brothers, Tesco, Procter & Gamble, Walmart, and IBM, to name a few.
- Berkshire has been building a stake in five different Japanese trading companies—large industrial conglomerates—for the better part of the last 12 months. Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni do business in a wide variety of areas (you may recognize the names from cars or tires), but the majority of their business models are associated with energy and materials. Berkshire has historically had allocations in these areas via their Berkshire Hathaway Energy division run by Greg Abel. Investments, such as Occidental petroleum and Dominion Energy, have gathered headlines over time. Given the attractive valuations of these companies, and the fact that they do business in areas Berkshire is familiar, makes them ideal candidates for the portfolio. It will be fascinating to see, however, if one or two of these companies end up becoming a larger part of the portfolio rather than owning all five. We saw earlier in the year that Berkshire had a similar purchase into major U.S. airlines, only to turn around.
- Some of Berkshire’s other major holdings tend to be overlooked. Moodys (#6), Charter Communications (#11), and Verisign (#12) have absolutely trounced the S&P over their holding period. In fact, since their most recent common purchase date on July 1, 2014, these three positions are up 250-327% since purchase versus the S&P at +100%. Not too shabby.
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