Warren Buffett is arguably the most successful investor in history, so tracking his buying activity could be a great way to discover new investment ideas for your own portfolio.
Fortunately, large investors like Buffett have to file a 13F report quarterly with the SEC detailing what they bought and sold in the prior quarter. In the case of Buffett, Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) most recent 13F suggests investors might want to consider buying Visa (V 1.17%), Phillips 66 (PSX 1.09%), and airline stocks.
IMAGE SOURCE: GETTY IMAGES.
Cashing in on credit
Berkshire Hathaway's Visa position increased 3% last quarter, or by 323,000 shares, to 10.6 million shares, valued at $828 million. Visa is far from the biggest stock in Berkshire Hathaway's portfolio, but Buffett and co-portfolio managers Ted Weschler and Todd Combs, appear confident that the shift from cash to credit isn't ending anytime soon.
Over the last 10 years, an explosion of online spending has helped propel transaction volume higher, and as a result, Visa's trailing 12-month revenue has increased from around $3 billion to about $15 billion. Over the same time period, Visa's net income has grown from less than $1 billion to nearly $6 billion.
V Net Income (TTM) data by YCharts
The pickup in transactions, revenue, and earnings doesn't appear to be fading either. Visa's payment volume increased 10% to $1.3 trillion last quarter, and its revenue improved 19% to $4.3 billion. Visa's fiscal fourth quarter adjusted net income was $1.9 billion and that puts the company on track for revenue to increase by at least 16%, and adjusted EPS to increase by mid-teens percentages, in the next 12 months.
IMAGE SOURCE: PHILLIPS 66.
Barreling ahead
Phillips 66 has become one of Berkshire Hathaway's biggest investments, and last quarter, Buffett added another 2.4% to his position. Buffett's Berkshire now owns a whopping 80.7 million shares in Phillips 66, worth $6.7 billion.
Buffett's interest in Phillips 66 may stem from the fact that it generates its revenue from everything except energy exploration. Instead, Phillips 66 makes its money producing chemicals, refining crude oil and natural gas, and marketing gasoline and natural gas. Its absence from oil exploration hasn't allowed it to dodge all of the profit headwinds associated with lower commodity prices over the past year, but it has provided the company with some nice insulation against the headwind. In the third quarter of 2016, Phillips 66's adjusted earnings were $556 million, and year to date its earnings were $1.4 billion.
Phillips 66 profitability in a less than favorable market suggests to me that if energy markets get friendlier, then its shares could head significantly higher. Even if markets stay flat for a while, investors may still benefit because shares are paying a market-beating dividend yield of 3%.
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Preparing for lift-off
One of the most interesting revelations from Berkshire Hathaway's quarterly 13F is that Berkshire Hathaway has done an about face on airline stocks.
As recently as 2013, Buffett referred to airline stocks as terrible investments, yet Berkshire Hathaway bought nearly $1 billion worth of American Airlines (AAL 0.44%), $301 million in Delta stock, and $285 million in United Continental stock last quarter. According to CNBC, Buffett bought shares in Southwest Airlines recently, too.
Berkshire Hathaway co-managers Ted Weschler and Todd Combs were probably the ones making these investments, not Buffett, but the decision to buy stocks in this historically, bankruptcy-plagued industry, is still intriguing given Buffett's past disdain.
Including four different airlines in the portfolio suggests that this is an industry-wide bet, not a stock specific bet. If that's the case, then the decision to buy airlines is probably being driven to some extent by profit tailwinds from cheaper jet fuel. According to the IATA, the price of jet fuel is 5.5% cheaper year over year, and because of that, the industry is on pace to book $21 billion in savings in 2016 alone. Airlines are also benefiting from decisions to avoid profit-busting price wars, and from investments in new, more fuel-efficient aircraft.
The four airline stocks that got added to Berkshire Hathaway's portfolio have returned 21% on average since the end of the third quarter and assuming jet fuel prices don't spike higher, and passenger trends remain favorable, these stocks could still have runway left ahead of them.
