For Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholders and fans of Warren Buffett, the previous weekend was the most-anticipated event of the year. On Saturday, May 2, Buffett held his company's annual shareholder meeting (albeit virtually) and provided the usual dose of long-term wisdom that investors look for. His "never bet against America" thesis was especially needed with the coronavirus disease 2019 (COVID-19) leading to a record level of labor market and economic disruption.
But what if I told you the Berkshire Hathaway shareholder meeting wasn't the most important event of the month for Warren Buffett?
It's time to take a look under Berkshire Hathaway's hood
That's because, later this week, Berkshire Hathaway will file Form 13F with the Securities and Exchange Commission (SEC), thereby disclosing the company's holdings, as of March 31, 2020. Form 13F is a required SEC filing for money managers with more than $100 million in assets under management. Form 13F is due 45 days following the end of a quarter, with Berkshire Hathaway often filing one day before the deadline. Thus, I'd count on Berkshire Hathaway's holdings being released this coming Thursday, May 14.
Understandably, Form 13F isn't a perfect tool for helping Wall Street and investors gauge sentiment. That's because it's providing an effective screenshot of what was in Buffett's portfolio 45 days ago. While Buffett and his team aren't exactly active traders, a lot has fundamentally changed across a variety of sectors and industries because of COVID-19. For instance, Buffett introduced a slide during his shareholder meeting showing that he and his team purchased $426 million worth of equities in April, but sold almost $6.51 billion in stock. These sales won't be reflected on Form 13F until mid-August, when Berkshire Hathaway makes its required filing with the SEC following the end of the second quarter.
But in spite of its shortcomings, 13Fs are still a great way to spot trends and see what the greatest minds on Wall Street have been up to. Here are my expectations of what we're likely to see from Berkshire's 13F filing on the buy and sell side of the equation.
What stocks did Buffett buy in the first quarter?
According to Berkshire Hathaway's first-quarter cash flow statement, the company wound up purchasing $4 billion in equities. Thus far, we know one acquisition for certain: DaVita (NYSE:DVA).
Based on an SEC Form 4 filing, Berkshire Hathaway acquired 470,000 shares of dialysis center operator DaVita on March 16, 2020, which raised its ownership in the company to more than 38 million shares. It also boosted Berkshire's stake in DaVita to over 30%. Since we don't get to choose when we get sick or what ailment(s) we develop, drug, device, and service companies in the healthcare sector, like DaVita, tend to be well-protected, even during broad-based economic downturns. The purchase looks to have paid off for Buffett, so far, with DaVita recently surpassing Wall Street's sales and profit expectations for the first quarter.
However, this DaVita purchase likely accounts for only $33 million to $34 million of the reported $4 billion in equity purchases during the first quarter. My educated guess is that Buffett was busy adding to JPMorgan Chase (NYSE:JPM), with his team building up its stakes in Biogen (NASDAQ:BIIB) and Kroger (NYSE:KR).
Since regulatory scrutiny is increased in instances where Berkshire owns more than 10% of the outstanding shares of a financial institution, it makes it unlikely that Bank of America, Berkshire's second-largest holding, would be added to. Meanwhile, Berkshire only owned a 2% stake in JPMorgan Chase entering the year, leaving plenty of room for purchase activity. JPMorgan Chase is consistently one of best big banks when it comes to return on assets, and Buffett greatly admires its CEO Jamie Dimon. With JPMorgan down 34% year-to-date, it looks like a no-brainer addition.
As for biotech blue-chip Biogen and grocery giant Kroger, it's very common for Buffett and his investment team to build up positions in new stocks over numerous quarters. After initially being added during the fourth quarter, history would suggest that both positions are likely larger now.
Here's what Buffett may have sold in Q1
Just as important is getting a peek at what Buffett and his team sold during the first quarter. Although Buffett announced during the shareholder meeting that his positions in all four major airline stocks have been liquidated, this almost certainly didn't occur in its entirety until sometime in the second quarter. What we do know from the Q1 cash flow statements is that Buffett's company sold or redeemed almost $2.2 billion in stock. What stocks those were is the great mystery.
A few names that come to mind are Phillips 66 (NYSE:PSX), Charter Communications (NASDAQ:CHTR), Travelers Companies, and Goldman Sachs. Why these four companies? The primary reason is Berkshire has either steadily been reducing its stake in these companies for some time, or has recently made a sizable reduction. Buffett isn't exactly known for paring his stakes and going back to business as usual.
For instance, oil and gas giant Phillips 66 was once one of Buffett's largest holdings, with over 80 million shares held. But with Berkshire now backing Occidental Petroleum, we've witnessed the Phillips 66 stake whittled down to 227,436 shares. I'd expect it to be gone once the 13F is filed.
Berkshire has also made impressive gains from cable provider Charter Communications, and has regularly pared down this position for a number of quarters. Today, Charter looks downright expensive at 40 times this year's forecasted earnings, especially when factoring in a less-than-impressive 4% sales growth rate. It's a likely candidate to have been trimmed in the first quarter.
In just a few days, we'll have an answer to the all-important question of what Buffett bought and sold during the wildest quarter on record for the stock market.