In recent days, all eyes have been on Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett. That's because Buffett's company recently filed Form 13F with the Securities and Exchange Commission, which is a quarterly requirement for companies and individuals managing more than $100 million in assets.
Form 13F is what allows Wall Street and investors the proverbial "look under the hood" to see what the brightest investment minds have been up to over the previous quarter. Although 13Fs do have limitations (e.g., the holdings listed are 45 days old when made public), they can still offer incredible insight as to what sectors, industries, stocks, and trends have money managers' attention.
In the latest 13F, the Oracle of Omaha wound up paring down his holdings in eight stocks, while also adding to, or opening positions in, eight securities. Excluding the two exchange-traded funds in which Berkshire Hathaway bought relatively small positions, let's take a closer look at the six stocks Buffett bought in the fourth quarter, as well as provide color as to why those purchases were made.
Kroger: 18,940,079 shares purchased
The biggest and most eyebrow-raising purchase of them all was the newly opened position in grocery giant Kroger (NYSE:KR). The $549.1 million position represented the biggest buy of the quarter for Buffett and his team.
Though some of Buffett's investment team are able to invest Berkshire's cash, this has all the hallmarks of being a Warren Buffett purchase. That's because Kroger is a brand-name with an easy-to-understand business model that's demonstrated the ability to stand the test of time. Despite not having stellar operating margins, grocers are somewhat recession-resistant given that consumers still need to buy food and household goods regardless of how well or poorly the economy is performing. Business stability is always something the Oracle of Omaha has appreciated.
Buffett is likely also a fan of Kroger's healthy 2.2% dividend yield and its "Restock Kroger" growth initiative, which focuses on omnichannel sales and pushes higher-margin products. In the third quarter, Kroger reported a 21% increase in digital sales from the prior-year period, so clearly these initiatives are working.
Occidental Petroleum: 11,465,546 shares purchased
The writing was almost certainly on the wall that Buffett would be adding to his position in Occidental Petroleum (NYSE:OXY) in the fourth quarter. This was a position that was opened during the sequential third quarter, and it's incredibly rare for Berkshire to buy into a company without adding in subsequent quarters.
The reason Buffett acquired more than 11.4 million additional shares of Occidental is simple: He views it as more attractive than integrated oil and gas giant Phillips 66, which he continues to pare down. Remember, Berkshire Hathaway pledged $10 billion in April 2019 to aid Occidental with its acquisition of Anadarko. This is not only a bet on higher long-term oil prices, but it's a specific bet by Buffett that Occidental, and its more than $10 in projected operating cash flow per share in 2020, is a bargain.
Suncor Energy: 4,261,031 shares purchased
Similar to Occidental, Berkshire Hathaway wound up adding to its position in Canada's largest integrated oil and gas company, Suncor Energy (NYSE:SU). Suncor Energy is an oil operator that Berkshire previously owned between 2013 and 2016. Buffett reopened a position in Suncor during the fourth quarter of 2018.
Why Suncor? The answer to that question is probably because its size makes it one of the safest oil plays throughout North America. Being an integrated oil company means that Suncor can take advantage of higher crude prices by drilling more oil. It also means that Suncor can lean on its downstream refining and petrochemical operations when crude prices fall and back-end demand for refined products picks up. This ability to hedge its bets is a key reason Suncor pays out a market-trouncing 4.7% dividend yield.
General Motors: 2,730,304 shares purchased
Another Berkshire buy during the fourth quarter that has Warren Buffett written all over it is the 2.73 million shares of General Motors (NYSE:GM) that were added. Buffett has often opined that investors should "be fearful when others are greedy and greedy when others are fearful," and this GM purchase looks to be a case of the latter.
There's little doubt that the auto industry is facing some serious challenges at the moment, especially with Chinese car demand slumping well in advance of the COVID-19 scare. General Motors' fourth-quarter was especially rough given the United Auto Workers' strike. For the quarter, vehicles sales slumped 9.4%, with sales off 13.3% in China. For the year, Cadillac remained a modest bright spot, but total Chinese unit sales fell 15.1%.
Yet, even with these issues, GM sports a relatively secure 4.4% yield and is valued at less than six times 2020 earnings. Even with the auto industry historically trading for a much lower earnings multiple than the benchmark S&P 500, less than six times EPS is inexpensive even for General Motors, and Buffett knows it.
Biogen: 648,447 shares purchased
Now, if there was a purchase that had all the hallmarks of not being Buffett's doing, the 648,447-share purchase of biotech company Biogen (NASDAQ:BIIB) is it.
You see, Buffett doesn't have the time or energy to keep up with clinical trials, which is a big reason he avoids investing in drug developers. The fact that Johnson & Johnson (once a core holding of Berkshire Hathaway) began shifting its business to a more pharmaceutical focus is likely one of the reasons Buffett sold nearly all of his stake in the company in the early part of the 2010s. The Biogen buy has all the feel of being a purchase made by one of Buffett's investing team members.
My suspicion is Buffett's investment team bought Biogen stock on the hope that aducanumab will be approved by the Food and Drug Administration (FDA) as a treatment for Alzheimer's. Aducanumab appeared to meet its primary end point in one of two late-stage studies, but there doesn't appear to be any clarity as to which way the FDA could eventually swing on this potential blockbuster. What is known is that well over 5 million Americans have Alzheimer's, making it a potentially lucrative indication if Biogen can get its drug approved.
RH: 500,504 shares purchased
Last, but not least, Berkshire Hathaway added to its stake in furnishings retailer RH (NYSE:RH). As with Occidental, Berkshire Hathaway opened its position in RH during the sequential third quarter. And as is customary for Buffett, he's continuing to build up that position in subsequent quarters.
What likely stands out most about this purchase is that RH isn't a brand-name company, which is what Buffett usually seeks out. Rather, RH does things differently. The company's oversized furniture absolutely stands out from its competition, as does RH's focus on sending consumers paper catalogs and spurring the push toward digital sales. Though such a business strategy might sound crazy, free cash flow through the first nine months of 2019 skyrocketed to $234 million from $19 million in the prior-year period, with adjusted operating income up 44%. Buffett will take results like that any day of the week.