For the past couple of years, Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.34%) CEO Warren Buffett has taken heat for his company's underperformance relative to the benchmark S&P 500. But the fact remains that Buffett is one of the best investors of all time, if you look beyond just his recent performance.
According to Berkshire Hathaway's 2019 shareholder letter, Buffett has led his company to an average annual return of 20.3% over the past 55 years. That compares to a 10% compound annual return for the S&P 500, inclusive of dividends, over the same time frame. This 10.3% annual gap might not seem like much nominally, but it's led to Berkshire Hathaway's stock outperforming the benchmark index by more than 2,700,000% since 1965.
Suffice it to say that when Warren Buffett buys or sells a stock, Wall Street and retail investors tend to play very close attention. That's what makes the past three weeks so exciting.
Buffett just went on a $10.5 billion buying spree
Between July 5 and July 22, Warren Buffett and his team deployed over $10 billion of the company's capital.
During the first week of July, Berkshire Hathaway announced that it would be acquiring an assortment of natural gas transmission pipelines and storage assets from Dominion Energy (D 0.13%) for $9.7 billion. This effectively includes paying $4 billion for the assets and assuming $5.7 billion in debt from Dominion tied to these assets.
For Dominion, the disposition of these transmission and storage assets will allow it to focus almost exclusively on its utility operations. The roughly $3 billion in cash received from Berkshire Hathaway, after taxes, will be used repurchase shares of the company's common stock, which may have a positive impact on earnings per share and perceived attractiveness by investors.
As for Berkshire Hathaway, it more than doubled its share of interstate natural gas transmission in the U.S. from 8% to 18% and landed itself a cash cow in the process. It also doesn't hurt that Berkshire nabbed a 25% stake in liquid natural gas (LNG) export, import and storage facility in Cove Point, Maryland. This is one of only six LNG import/export points in the U.S.
But that's not all.
This past week, a Securities and Exchange Commission filing shows that Buffett's company acquired just over 33.9 million additional shares of Bank of America (BAC -0.67%) between July 20 and July 22. The cost of these purchases comes to $813.3 million, and it upped Berkshire's ownership in BofA to almost 982 million shares (11.3% of all outstanding shares). BofA is Berkshire's second-largest holding behind Apple, in terms of market value.
It's no secret that the Oracle of Omaha loves bank stocks, and Bank of America certainly looks to be his favorite. It's possibly the most interest-sensitive of the big banks, which sets BofA up to be a big-time beneficiary once the Federal Reserve begins raising rates in 2023.
Furthermore, Bank of America has done an incredible job of controlling its noninterest expenses in the past half-decade. By emphasizing its digital banking and mobile apps, BofA has seen a steady uptick in retail banking transactions completed online, which has allowed it to close some of its physical branches and reduce its expenditures.
The bad news: It took Buffett 4.5 years before he finally pulled the trigger
While it's great news to see Buffett deploying his company's war chest, it's equally disturbing to point out that it took the Oracle of Omaha approximately 4.5 years to put some of Berkshire's capital to work.
Following the acquisition of Precision Castparts in January 2016, Berkshire Hathaway took until July 5, 2020 to announce another decent-sized acquisition. By sitting idle, Buffett's company has seen its cash hoard grow to $137 billion, as of the end of March 2020. Though having cash isn't inherently bad, it isn't good news for a conglomerate like Berkshire Hathaway, which has historically made a living by investing its capital and acquiring attractive businesses.
Even after deploying $10.5 billion over the past three weeks, there's still no guarantee that Berkshire Hathaway's cash pile will have shrunk. Buffett noted during the company's virtual annual shareholder meeting in early May that it had disposed of more than $6 billion worth of stock in April, and may have sold additional positions since then. Coupled with the cash flow generated from the company's roughly five dozen owned businesses, Berkshire could still have close to $137 billion in cash and marketable securities when the dust settles.
Buffett's unwillingness to pull the trigger on a larger deal or get more aggressive on the investment front looks to be a silent warning to Wall Street and investors. Buffett may not believe in market timing, and he certainly wouldn't bet against the American economy over the long run. But his inaction over the past four-plus years plainly suggests that he doesn't view equities as attractively valued.
It also doesn't help that Buffett has a very limited scope of research to work with. To be clear, what Buffett does, he does exceptionally well. But his focus has always been on the financial sector and consumer staples. With technology and biotech outperforming in recent years, and Buffett having little to no expertise in these areas, he's been left to remain idle on the sidelines.
Perhaps the only true value that Buffett sees right now is his own company. Over a seven-quarter stretch, beginning at the midpoint of 2018, Buffett and his team repurchased in excess of $7 billion worth of Berkshire Hathaway stock. As long as Buffett and right-hand man Charlie Munger view Berkshire as trading at a sizable discount to its intrinsic value (with this being a somewhat arbitrary term), perhaps the only guarantee is that Buffett will continue to spend to repurchase his own company's stock.
That's decent news for Berkshire Hathaway shareholders, but not a very warm outlook for U.S. equities.