May is a big month for Berkshire Hathaway (BRK.A 0.53%)(BRK.B 0.64%) investors and all-around fans of Warren Buffett.
On May 2, Berkshire held its annual meeting, with Buffett providing his usual doses of insight on the economy and broader market. But later this week, we're going to get the release of Form 13Fs from money management firms with more than $100 million in assets under management -- that includes Berkshire Hathaway. In other words, we're going to get a firsthand look at what, exactly, the brightest minds on Wall Street were buying and selling during the fastest bear market descent in history.
Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.
According to Berkshire Hathaway's first-quarter cash flow statement, we know that Buffett and his team purchased $4 billion in equities between Jan. 1, 2020 and March 31, 2020. But the only two purchases we know for certain are the 470,000 shares of dialysis center operator DaVita bought on March 16, and the roughly 976,000 shares of Delta Air Lines acquired in early March. These represent purchase values of around $33 million and $45 million, respectively, according to filings with the Securities and Exchange Commission.
So what did Buffett buy nearly $4 billion of in Q1? While we'll have to wait until Thursday or Friday of this week for confirmation, my money is on the following five stocks.
JPMorgan Chase
It's no secret that Buffett is a big fan of the financial sector, and more specifically bank stocks. However, Berkshire already has sizable equity stakes in a number of America's top money-center banks. If Berkshire owns more than a 10% equity stake in a publicly traded bank, it can increase regulatory scrutiny from the Federal Reserve, which is something Buffett would rather just avoid. That eliminates the likes of Bank of America or U.S. Bancorp from being added to, as they're butting right up against the 10% mark. But with Berkshire holding only a 2% stake in JPMorgan Chase (JPM +0.58%), it becomes a logical first-quarter addition.
JPMorgan Chase is consistently one of the top big banks when it comes to return on assets, and unlike its peers has been more than willing to open new physical branches in regions where it feels it can take market share. With a steady focus on digital and mobile banking apps, and a CEO (Jamie Dimon) whom Buffett greatly admires, JPMorgan Chase is a very likely add during the first quarter.
Image source: Getty Images.
Kroger
Next up is national grocer Kroger (KR 0.93%), which Buffett has hinted was a selection of a member of his team and not of the Oracle of Omaha himself. The reason Kroger makes for a logical addition is simple: Berkshire opened its stake during the fourth quarter. It's highly unusual for a Berkshire Hathaway equity stake to be opened entirely during one quarter. It's far more common for Buffett and his team to build a position in a company over multiple quarters, making an addition to Kroger during Q1 likely.
If Buffett's investment team did wind up adding to Kroger during the first quarter, they're probably quite pleased with what they've seen, thus far. Panic buying associated with the coronavirus disease 2019 (COVID-19) is likely to boost Kroger's sales and near-term profitability. Plus, the Restock Kroger initiative looks to be bearing fruit, with digital sales growing 22% from the prior-year period in the fourth quarter.
Image source: Getty Images.
Biogen
Another probable addition during the first quarter is biotech blue-chip Biogen (BIIB +1.11%). Similar to Kroger, Biogen became a new position in Berkshire Hathaway's portfolio during the fourth quarter, and it's typically for Buffett and his team to build a stake over multiple quarters. In this instance, we're assuredly talking about the decisions being made by Buffett's investment team, as the Oracle of Omaha is generally no fan of drugmakers and keeping up on clinical study results.
What's likely attracted Buffett's team to Biogen is the company's experimental Alzheimer's disease therapy aducanumab. While aducanumab did meet the primary endpoint in one of its two late-stage clinical trials, there's been little clarity as to whether the data is strong enough to merit approval from the Food and Drug Administration (FDA). As an indication with a high clinical fail rate, a newly approved Alzheimer's therapy could fetch multi-billions of dollars in annual sales. But it could also sink Biogen if the FDA fails to offer its thumbs-up. It's certainly a riskier play than we're typically used to seeing in Buffett's portfolio.
Image source: Getty Images.
Suncor Energy
Despite the train wreck that is the oil industry of late, I do expect Buffett to have added to his company's position in Suncor Energy (SU +1.75%), which was also opened during the fourth quarter. This is actually Buffett's second go-around with Suncor, as Berkshire was a previous shareholder between 2013 and 2016.
Aside from the fact that Buffett is a long-term believer in higher oil prices, Suncor Energy is arguably Canada's safest oil stock. As an integrated company, it's able to take advantage of higher oil prices by drilling more, and can hedge weaker price environments by leaning on its downstream refining and chemical operations. The margins certainly aren't as robust in the latter scenario, but it's better than not being diversified.
But unlike the Kroger stake, Buffett can't be thrilled with what he's seen so far out of Suncor. With unprecedented disruption in the oil market, Suncor has slashed its dividend by 55% and reduced its capital expenditures for the year by approximately a third to a midpoint of $3.8 billion Canadian. These moves are necessary, but it means less income for Berkshire Hathaway in the meantime.
Image source: Getty Images.
PNC Financial Services
Last, but not least, I wouldn't be surprised if Buffett also took the time to add to his company's stake in regional banking giant PNC Financial Services (PNC +1.65%) during the first quarter. That's because PNC has been consistently trading below its book value for the past two months, and Buffett has a hard time overlooking at discount in the banking space. What's more, Berkshire owns only a 2.3% stake in PNC Financial, leaving plenty of room to add on.
As you might expect, PNC Financial's first-quarter results featured a higher provision for loan losses and the typical rhetoric we've seen from other banks regarding weaker net interest income to come due to lower interest rates. Nevertheless, PNC managed to grow average loans and deposits in its retail banking business by 8% and 5%, respectively, and returned $1.9 billion to shareholders in Q1 via a combination of dividend payouts and share buybacks. Though often overshadowed by larger money-center banks, PNC Financial is just the type of stock Buffett seeks out when times are tough.
