Though Warren Buffett's performance over the past decade hasn't exactly been stellar, his long-term track record speaks for itself.
The CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has led his company to an average annual return of 20.3% over the past 55 years, which is more than double the average annual return (10%) of the S&P 500, inclusive of dividends, over the same time frame. When represented as an aggregate figure, the S&P 500 is up almost 19,800%, while Berkshire Hathaway has gained an insane 2,744,062%. That's why people pay attention when Warren Buffett buys or sells a stock.
With an all-time record $137 billion in cash in Berkshire Hathaway's coffers, the big question on most folks' minds is what, if anything, has Buffett been buying? Thanks to required filings with the Securities and Exchange Commission (SEC), we partially know the answer. Since the beginning of April, Berkshire Hathaway has increased its stake in Liberty Sirius XM while reducing or exiting its stake in a half dozen other companies. But to get the full story of what Buffett and his team have bought and sold, we typically have to wait until 45 days after a quarter ends, which is when money managers with more than $100 million in assets under management file Form 13F with the SEC.
Though we still have roughly seven weeks to go before Berkshire Hathaway will file its 13F, I'm willing to bet that Buffett purchased the following three stocks during the volatile second quarter.
As you may already know, Buffett's favorite place to park Berkshire's capital is in financials -- and more specifically bank stocks. However, there are limits to Berkshire Hathaway's ownership stakes. If Buffett's company were to hold more than a 10% stake in a bank, it could be classified as a bank holding company, which would add increased federal oversight and restrictions. With a number of Buffett's favorite banks, such as Bank of America, Bank of New York Mellon, and U.S. Bancorp, already at this 10% threshold, Buffett would likely look elsewhere to add to his favorite industry -- and that "elsewhere" is probably M&T Bank (NYSE:MTB).
M&T Bank, which Berkshire owns a 4.2% stake in, is a logical addition for a handful of reasons. One, it's often one of the top-performing regional banks, at least in terms of return on assets (ROA). Excluding the coronavirus-impacted first quarter, M&T was regularly delivering an ROA of 1.6% in 2019, which is exceptionally good for a bank that ended the first quarter with almost $125 billion in total assets and roughly $94 billion in outstanding loans.
Secondly, M&T has made a habit of accelerating its immediate and long-term organic growth rate by making acquisitions. Since 1987, M&T has completed 23 separate buyouts, with these deals yielding more than $96 billion in total assets, according to information on file with M&T Bank. Though these acquisitions have been few and far between over the past decade, the northeastern-focused M&T Bank has gone for higher-quality deals in that time.
Lastly, M&T is now valued at 98% of its book value, which is its cheapest price-to-book ratio in more than a decade. It's ripe for the picking by Warren Buffett.
PNC Financial Services
Considering that regional bank PNC Financial Services (NYSE:PNC) was the only stock Buffett and his team added to during the first quarter that's still being held in Berkshire Hathaway's portfolio, it makes sense that Buffett will likely have boosted his company's stake in PNC during the second quarter.
As discussed above, Warren Buffett doesn't want to deal with the potentially restrictive oversight of being labeled a bank holding company by the Federal Reserve. This means keeping his company's stakes in banks stocks at less than 10%. In the case of PNC Financial Services, Berkshire Hathaway only owns a 2.2% stake, which leaves ample room for expansion.
Similar to M&T Bank, what Buffett has to love about PNC Financial is its outperformance relative to most regional banks. Last year, PNC was delivering an ROA that regularly topped 1.3%. For context, most banks tend to generate a 1% return on their assets. During the coronavirus disease-impacted first quarter, PNC Financial also managed to grow its loans and deposits (aka, the bread and butter of the banking industry) for its retail banking segment by a healthy 8% and 5%, respectively.
As a final selling point for PNC Financial, the company is currently valued at 1% above its book value, which represents its cheapest valuation relative to book (based on where it's ended the year) since 2013. Tack on a greater than 4% yield, and there's real value and income to be had here.
Finally, investors shouldn't be surprised if the stock Buffett remains the fondest of is that of his own company, Berkshire Hathaway.
After a multiyear period in which the Oracle of Omaha chose not to repurchase shares of Berkshire Hathaway stock, he and his right-hand man, Charlie Munger, have given common stock repurchases the thumbs up over the past two years. In 2018, Buffet bought more than $1 billion worth of Berkshire stock, with another roughly $5 billion repurchased in 2019. During the first quarter of 2020, close to $1.6 billion in Berkshire stock was rebought by the company.
What folks might not realize is that two criteria need to be met in order for Berkshire's common stock to be repurchased. First, the company needs to have a minimum of $20 billion in cash on hand, which is easily met at the moment. Secondly, Buffett and Munger need to agree that Berkshire is trading at a significant discount to its intrinsic value. Considering that this dynamic duo has spent well in excess of $7 billion over the trailing two-year period rebuying Berkshire Hathaway stock, you should have a good idea of how inexpensive they believe their company is.
Fundamentally, Buffett and Munger are right to be aggressive. At 18% above its book value, Berkshire is at its cheapest valuation since 2012. I'd be genuinely shocked if additional shares aren't repurchased during the second quarter.