When it comes to Wall Street investment greats, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett is in a class of his own. Since ascending to the CEO chair in the mid-1960s, he’s overseen an aggregate return in his company’s Class A shares (BRK.A) of nearly 5,500,000%, as of the closing bell on Aug. 23.
When you leave the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite so decisively in the dust in the way Warren Buffett has for almost 60 years, you’re going to draw quite the audience. Riding Buffett’s coattails has been an undeniably effective money-making strategy for decades.
In theory, mirroring the trades made by the Oracle of Omaha and his trusty top aides, Todd Combs and Ted Weschler, is easy. Quarterly filed Form 13Fs provide a concise snapshot of what Wall Street’s brightest money managers have been buying and selling.
However, Berkshire Hathaway’s 13F is missing a big part of the story. Namely, a company whose shares have been purchased by Buffett for an incredible 24 consecutive quarters.
Despite being a selective buyer, Buffett is betting big on oil stocks
Although Warren Buffett has repeatedly opined that investors would be wise not to bet against America, what he suggests over the long run and what he and his investment team do over shorter timelines don’t always mesh.
In each of the last seven quarters (ended June 30), Berkshire’s dynamic investment trio have been net-sellers of equities to the cumulative tune of $131.6 billion. No company has contributed more to this net-selling activity than Berkshire’s top holding, Apple. Buffett and his crew have disposed of more than 500 million shares of the tech giant since Oct. 1, 2023.
Despite being a very selective buyer of late, the one stock Berkshire’s 13Fs show he’s been buying with regularity for more than two years is integrated oil and gas company Occidental Petroleum (NYSE: OXY).
A little over 10% of Berkshire Hathaway’s 45-stock, $315 billion investment portfolio is tied up in oil stocks — more specifically, Occidental and Chevron. Energy stocks have rarely played a big role in Berkshire’s portfolio over the past quarter of a century, so this is quite the deviation from Buffett’s traditional investment strategy.
Since the start of 2022, Buffett has overseen the purchase of more than 255 million shares of Occidental Petroleum. The thesis behind this steady purchasing activity might have to do with constrained global crude oil supply.
For approximately three years during the COVID-19 pandemic, a historic demand cliff for energy commodities encouraged oil and gas producers to slash their capital expenditures (capex). Even with capex levels having returned to normal, multiple years of reduced spending have tightened global supply and provided a hearty lift to the spot price of oil.
Though a higher spot price for crude oil lifts all drillers, Occidental generates a higher percentage of its revenue from drilling than most integrated operators. In other words, it’s more sensitive to changes in the spot price of crude oil. If supply constraints persist for years to come, it should uniquely benefit Occidental’s cash flow generation and bottom line.
Meet the stock Warren Buffett has purchased for 24 consecutive quarters
While Buffett has been buying shares of Occidental Petroleum with some regularity since 2022 began, this doesn’t come close to matching the stock he’s purchased every quarter for six consecutive years.
As I stated previously, you’re not going to find any reference to these purchases in Berkshire Hathaway’s quarterly 13F. Rather, you’ll need to look on the final page of Berkshire’s quarterly operating results, just prior to the executive certifications. This is where you’ll find evidence of the company’s share repurchasing activity, and come to the realization that the stock the Oracle of Omaha can’t stop buying on quarterly basis is shares of his own company!
Buying back shares of Berkshire Hathaway stock hasn’t always been easy. Prior to mid-July 2018, buybacks were limited to instances where Berkshire’s stock traded at or below 120% of book value. At no point for many years leading up to July 2018 had the company’s stock fallen below this threshold, which meant no buybacks were undertaken.
On July 17, 2018, the company’s board reworked the covenants that governed buybacks to allow Warren Buffett and his then right-hand man Charlie Munger, who passed away in November 2023, to get off the sideline and undertake buybacks if they saw fit to do so.
Under the new criteria, buybacks can be made with no end date or ceiling as long as:
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Berkshire Hathaway has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet; and
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Warren Buffett (and previously Charlie Munger) believe shares are intrinsically cheap.
Buffett’s company closed out June with a record $277 billion in cash, cash equivalents, and U.S. Treasuries, which has given the Oracle of Omaha more than enough confidence to continue repurchasing shares of Berkshire. The roughly $345 million in share repurchases executed during the second quarter increased Buffett’s cumulative buybacks of his own company’s stock to nearly $78 billion over the last 24 quarters.
Why the big emphasis on stock buybacks by Warren Buffett and his team? For one, it’s incrementally increasing the ownership stakes of existing shareholders over time. This incentivizes the long-term ethos that Munger and Buffett have championed for decades.
Furthermore, steadily reducing the company’s outstanding share count via buybacks should provide a nice lift to earnings per share (not accounting for variances in unrealized investment gains/losses). Companies that generate steady net income, like Berkshire Hathaway, may be viewed as more fundamentally attractive by investors because of its buyback program.
Even though Berkshire Hathaway’s stock is pricey by historic standards — 162% of book value, as of Aug. 23 — a nearly $277 billion cash pile gives Warren Buffett more than enough reason to continue repurchasing shares of his favorite stock.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Has Bought Shares of This Stock for 24 Consecutive Quarters — and It’s Not Occidental Petroleum was originally published by The Motley Fool
Source: finance.yahoo.com