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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Stocks hit another record high on Thursday, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI ) gaining 0.48% and 0.35%, respectively. Both indexes are sitting at all-time highs.
Institutional money managers must report their stock positions to the SEC within 45 days of the end of each calendar quarter, and Warren Buffett's bricks-to-railroad conglomerate, Berkshire Hathaway (NYSE: BRK-B ) , follows the same rule. The most noteworthy change Buffett made to Berkshire's portfolio is the addition of a sizable new position – 40.1 million shares valued at $3.4 billion -- in energy supermajor ExxonMobil (NYSE: XOM ) . In fact, Buffett constituted roughly three-quarters of the position in the second quarter and obtained confidential treatment from the SEC in his previous filing as he continued to build the position.
In many ways, ExxonMobil is an obvious choice for Berkshire's portfolio; here are three reasons Buffett selected it:
It's just plain cheap
At 11.8 times estimated earnings per share for the next 12 months, ExxonMobil shares trade at a 23% discount to the S&P 500's forward earnings multiple; meanwhile, it pays a 2.7% dividend yield against just 2% for the index. Furthermore, the valuation was lower when Buffett was building his position -- the stock's average forward earnings multiple was 11.3 in the second quarter and just 10.8 in the third quarter -- the sort of multiples that ought to generate some interest when they are associated with one of the best managed, most profitable companies in the world.
ExxonMobil is the second-largest company in the world by market value
The reported value of Berkshire's stock holdings per today's filing is a staggering $92 billion. In addition, Berkshire generates a flood of cash on a permanent basis that Buffett must attempt to allocate profitably. (Berkshire's operating cash flow for the first nine months of 2013 was $20.7 billion.)
As such, when it comes to publicly traded stocks, Buffett can't waste his time on minnows; he needs to focus exclusively on hooking the largest groupers in the corporate ocean. With a market value of $407 billion, ExxonMobil -- the world's second most valuable company -- is just such a catch. ExxonMobil's size and liquidity enabled Buffett to make it his largest new position since he put more than $10 billion to work in another megacap issue, IBM, in 2011.
ExxonMobil has longevity
Warren Buffett will only invest in businesses that have genuine staying power; for a long-term investor with a multigenerational time horizon, permanence is a very attractive quality.
Buffett's confident that ExxonMobil shares that characteristic. We know this because in his 2011 shareholder letter, he argued against buying gold by comparing the far-in-the-future value of all the world's existing gold stock in the world and a hypothetical portfolio of productive assets with the same current value made up of "all U.S. cropland..., plus 16 ExxonMobils." In the conclusion of his argument, he writes:
A century from now... ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions...
A century is a long time, but there is every reason to believe ExxonMobil will be churning out gobs of cash -- and returning it to shareholders -- for the next several decades. That's not a bad start for a buy-and-hold investor, particularly when it is bought at the right price.
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