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Top Stocks Warren Buffett Just Bought

By Todd Campbell – Feb 21, 2020 at 8:01AM

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Berkshire Hathaway's biggest buys last quarter may surprise you.

Warren Buffett knows a thing or two about picking the best stocks. According to Forbes, he's one of the world's richest people. Since he's made his fortune investing, it could be wise to follow in his footsteps. Fortunately, his investment company, Berkshire Hathaway (BRK.A -0.97%) (BRK.B -0.81%), files a 13F report with the Securities and Exchange Commission every quarter revealing his activity. The latest report discloses Berkshire Hathaway's established new positions in Kroger (KR -1.69%) and Biogen (BIIB -4.46%). Here's why he might believe they're bargains worth owning.

Betting on a turnaround

Kroger's performance in the first half of 2019 left a lot to be desired. Shares sold off sharply to their lowest since 2017 because of weaker margins and, arguably, expansion plans that tried to do too much too fast. In response, Kroger's cutting costs and refocusing on its core grocery business.

Warren Buffett speaks at an investor conference.

IMAGE SOURCE: THE MOTLEY FOOL.

Apparently, Warren Buffett -- or his portfolio managers -- thinks the company can get back on track. After Kroger reported non-GAAP EPS of $0.44 last September, beating industry watchers' projections by $0.03, Berkshire Hathaway established an 18.9 million-share position, giving it a 2.3% ownership stake worth about $550 million.

In November, Kroger forecast 2020 same-store sales growth of 2.25%, up from an expected 2% in 2019. It also said it would deliver 2020 earnings per share (EPS) of between $2.30 and $2.40, slightly better than the $2.30 analysts were modeling. Management also stressed that its operating margins would allow it to continue returning money to investors through dividends and buybacks. As evidence, it announced a new $1 billion stock-repurchase program.

Berkshire Hathaway's buying is encouraging, but there's still reason to temper enthusiasm, because the stock has already made a big move up since fall, and its turnaround could take time. In December, it reported third-quarter financials that missed estimates on both the top and bottom lines.

It also shouldn't be ignored that the grocery industry is becoming increasingly competitive. Amazon (AMZN -2.72%) acquired Whole Foods Market for $13.7 billion in 2017, and rumors say that it's developing a new grocery store concept to appeal to more shoppers. Amazon also recently removed the monthly fee associated with Amazon Fresh delivery for Prime members, another indication it's hungry for market share that could come at Kroger's expense.

A patent win, plus a long-shot bet that could pay off

Warren Buffett typically avoids tough-to-understand industries like biotech, but that didn't stop Biogen from showing up in the Oracle of Omaha's portfolio last quarter.

Biogen is best known for its blockbuster multiple sclerosis drugs, including the $4.4 billion-per-year oral medicine Tecfidera. However, its shares crashed last spring after management reported its clinical-stage treatment for Alzheimer's disease, aducanumab, wouldn't reach its primary endpoint in a late-stage trial.

The news was particularly disappointing because Biogen was counting on new drugs for neurodegenerative diseases, including Alzheimer's disease, to diversify away from Tecfidera, which was under fire from generic-drug makers seeking to invalidate its patent protection. The sell-off caused Biogen's price-to-free-cash-flow ratio to fall to its lowest level in at least 10 years, creating an opportunity for value investors like Berkshire Hathaway.

BIIB Price to Free Cash Flow Chart

BIIB Price to Free Cash Flow data by YCharts.

Although Biogen had said previously that aducanumab was a bust, it reversed its stance in October. After management parsed the drug's trial data, it determined it could file for and potentially receive Food and Drug Administration approval after all. Biogen's bargain-bin valuation and the renewed potential for aducanumab's approval might have been why Berkshire Hathaway bought 648,000 shares in Q4, worth about $192 million.

It's a small position given Berkshire Hathaway's portfolio exceeds $200 billion, but the bet is already paying off. Biogen announced plans to buy back up to $5 billion in stock in December, and in February, shares jumped after the company won a key Tecfidera patent case, suggesting it might be able to stave off generic competition until 2028. Barring a successful appeal of that ruling, the company's financials appear to be on solid ground, and since a decision on aducanumab could come as soon as this year, it wouldn't surprise me if Berkshire Hathaway would add more shares to its position this quarter.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Todd Campbell owns shares of Amazon. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), and Biogen and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Biogen Inc. Stock Quote
Biogen Inc.
BIIB
$264.28 (-4.46%) $-12.33
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$406,700.00 (-0.97%) $-4,004.98
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$269.58 (-0.81%) $-2.20
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$114.80 (-2.72%) $-3.21
The Kroger Co. Stock Quote
The Kroger Co.
KR
$44.68 (-1.69%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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