In this Industry Focus: Financials clip, host Shannon Jones and Motley Fool contributor Matt Frankel discuss the most important activity and why Buffett may have added to these positions.
A full transcript follows the video.
This video was recorded on Aug. 20, 2018.
Shannon Jones: As promised, when we covered Berkshire's earnings a couple of weeks ago, we said we would come back to our listeners to talk about what exactly Berkshire and friends were buying and selling in the second quarter of this year. It's obviously something that investors always look forward to. This quarter, no exception.
What we see, high-level, is, despite the aging bull market that's going on, Berkshire was definitely a net buyer and even went on a bank-buying bonanza. Matt, what can you tell us about what Berkshire is buying?
Matt Frankel: There were a few notable buys this quarter. Apple (NASDAQ:AAPL) is the big one, as has it has been for the past few quarters. Berkshire added about 5% to its Apple stake this quarter, which doesn't sound like a lot, but we're still talking about billions of dollars. The Apple stake is actually worth about $55 billion right now. This is by far their biggest stock investment. It keeps getting bigger.
If comments from Warren Buffett and Charlie Munger are any indicator, it could continue to get bigger. They've both made comments that they would love to own more of Apple. Munger actually said they would love to own the whole thing if they could. Obviously, they can't. Berkshire still has over $100 billion of cash sitting on the sidelines. It's entirely possible that, if they still perceive Apple as a good value, the stake could continue to get bigger.
Beyond that, there are two other big categories of investments Buffett made. He invested in three different bank stocks that they already owned. Buffett didn't buy anything new this quarter. He bought more US Bancorp and Bank of New York Mellon, both of which are considered some of the best-run, best-quality banks in the sector, and both of which have under-performed the market significantly over this year so far. Buffett also loaded up on Goldman Sachs, which is interesting, particularly, because he sold Goldman Sachs a few years ago, a little bit of his stake. Now it looks like he's seeing it as a good value again, since it's been one of the laggards of the sector. That was a Buffett stock that originated in the financial crisis, did really well in the few years after he acquired it, and now has come down a little bit. It looks like Buffett might be starting to build a position in that again.
And, airlines were the other big category that Buffett bought this quarter. Buffett made big headlines, a couple of years ago, about two years ago, when he bought stakes in all four of the major U.S. airlines -- Delta, American Airlines, United and Southwest. This quarter, Buffett added significantly to his Delta and Southwest stakes, over $500 million into each one. This is almost a 20% increase on each stake. There's been widespread speculation that Buffett's going to eventually buy and hold airlines, particularly Southwest.
His method of investing in the airlines has a lot of parallels to when he invested in railroads a few years ago, and eventually acquired BNSF Railroad, which Berkshire still owns. There's been a lot of speculation. This is likely to only add fuel to that fire, especially since one of the two he added to was Southwest. Berkshire could easily afford to buy the portion of Southwest that they don't already own just with the cash they have in the bank. That's a very significant investment.
In addition, Berkshire made a couple of smaller purchases. "Smaller," I mean in the $50 billion ballpark each. That's still small to Berkshire. General Motors is one that had a pretty bad second quarter. He could have just added to that as a value play. Teva Pharmaceuticals is another big one, the generic drug maker that he bought into a little while ago. It's still a relatively small position for Buffett. And, Liberty Global, he added a little bit to his investment.
The airlines, Apple, and the banks were the three big attention-grabbers of the quarter.
Jones: From an industry perspective, when we're thinking about it from a read through to everyday investors, you mentioned he loaded up quite a bit on a couple of airline stocks and on banks. Do you think, for average investors like us, now is a really good time to actually be buying into these industries? If so, why?
Frankel: Banks, I particularly like, not just because they're my specialty. They've been one of the worst performers of 2018, after really, really good performance over the past few years. If you pick and choose, in the way Buffett's doing, picking the ones who have underperformed even the poorly performing banking sector ... US Bancorp is, in my opinion, the best-run of the big banks, period. Goldman Sachs, I've written several times, I think, is one of the best values in the banking space, just because of their vast potential when it comes to commercial banking that they're just starting to scratch the surface of. I like that.
Apple's always a winner. I own it in my own portfolio. It's really, really tough to make a case against Apple as an investment, unless you might think it has gotten a little bit too expensive. And, airlines, I don't know if it's a great time to get into the sector, unless you're speculating on which one Buffett might take out. To be perfectly honest, airlines are a little bit outside of my wheelhouse, so I don't really want to give anyone definitive advice one way or the other on them.
Jones: Yeah, agreed. I think definitely, from the financials sector, you've got it underperforming the market so far in 2018. And then, too, we did an episode, maybe about three or four weeks ago, talking about big bank earnings. You've got really strong fundamentals with many of these major banks. So, to see them underperforming the market actually opens up a really awesome buying opportunity to get in on either new positions into some of these stocks, or really to load up on some of your current positions. I agree with you 100% on following into bank stocks and into that particular industry.
Matthew Frankel, CFP® owns shares of Apple, Berkshire Hathaway (B shares), and General Motors. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares) and Southwest Airlines. The Motley Fool has a disclosure policy.