There's little question that Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett is one of the greatest investors of our generation. Over the last 55 years, Buffett has led Berkshire to a compound annual return of 20.3%, which compares to a 10% return for the benchmark S&P 500, inclusive of dividends, over the same time frame. In aggregate, this works out to an outperformance of more than 2,700,000%
Yet, what's surprising about the most-renowned buy-and-hold investor is that he hasn't been buying much lately. Through the first half of 2020, the Oracle of Omaha and his team have reduced or eliminated their stakes in 32 separate stocks.
Although Buffett has a history of being very, very right, he's not perfect. For example, Buffett sold a 5% stake in Disney in 1967. Between 1999 and 2000, Berkshire also parted ways with Disney stock after Disney bought Capital Cities/ABC. These decisions cost the Oracle of Omaha close to $19 billion.
Buffett also made a big mistake by selling his stakes in home improvement retailers Home Depot and Lowe's. Berkshire exited its positions in both companies in the second half of 2010. Home Depot and Lowe's have tacked on additional gains of over 800% and 700%, respectively, since Buffett sold.
In other words, not every stock Buffett sells is necessarily headed lower.
Of the more than two dozen stocks Berkshire Hathaway has sold this year, investors should consider the following four as ones worth buying, not selling.
One company that Buffett has been aggressively selling in recent quarters happens to be one of Berkshire Hathaway's longest-tenured holdings: Wells Fargo (NYSE:WFC).
There are certainly reasons for investors to be skeptical of bank stocks at the moment -- especially Wells Fargo. The Federal Reserve's pledge to keep lending rates at or near historic lows for the next couple of years will suppress the interest income potential for banks. At the same time, recessions often increase loan delinquencies, further hurting the earning potential of banks.
Wells Fargo also admitted that it had created 3.5 million fake accounts between 2009 and 2016 as part of an aggressive cross-selling campaign at its branches. Buffett is a big believer in strong management teams, and Wells Fargo is on its third CEO in nearly as many years.
However, there's plenty of promise here, too. Banking flubs happen from time to happen, and consumers are usually pretty quick to put them into the rearview mirror. For instance, Bank of America's liability during the mortgage meltdown, as well as its attempt to charge its debit-card holders a monthly usage fee in 2011, are all now a distant memory. The same will be true, soon enough, of Wells Fargo's account scandal.
Wells Fargo also has a long history of attracting more affluent clientele and delivering above-average return on assets (ROA). Wall Street has rarely had an issue paying a premium for Wells Fargo's stock because of its history of producing superior ROA.
But the biggest selling point might just be the valuation. At 64% of its book value, Wells Fargo is as cheap as it's been in at least a decade. As Buffett pares down his stake, investors should consider buying in for the long haul.
There are two probable reasons I can offer as to why Buffett or his team sold over 82 million shares of Sirius XM during the second quarter. First, I'd blame weak auto sales. Sirius counts on teaser subscriptions with new auto sales to translate into long-term paying subscribers. With auto sales weakening, this could mean a slower rate of new paying subscribers.
The other concern is that Sirius XM purchased Pandora in February 2019, which happens to be an ad-driven platform. When recessions strike, ad-based models tend to get clobbered -- and we've certainly seen that in Sirius XM's operating results through the first six months of the year.
But there's another side to this company that Buffett may be overlooking. For example, even though ad spending was down 8% during the first-half of 2020, ad revenue only accounted for 13.6% of total sales. The bulk of Sirius XM's revenue (82.7%) is derived from high-margin and very predictable subscriptions. This is important because subscriptions are far less likely to be cancelled during periods of economic weakness than businesses are to pull back on their ad budgets. In short, this dynamic allows Sirius XM to emerge from recessions much faster than its terrestrial and online radio competitors.
Sirius XM also benefits from the fact that its business is designed to deliver improved margins over time. Though revenue and royalty costs can vary from quarter to quarter, the costs to operate its satellite network are more or less fixed. No matter how many subscribers the company has, its costs will remain close to where they are now. Thus, as long as Sirius XM continues to steadily grow its subscriber base, and passes along the occasional price hike, its operating margins and cash flow should keep expanding.
Visa and Mastercard
Perhaps the biggest head-scratcher of them all was the modest selling of payment facilitators Visa (NYSE:V) and Mastercard (NYSE:MA) during the second quarter. Mastercard and Visa have been staples in Buffett's portfolio since Q1 2011 and Q3 2011, respectively.
Why these two credit services companies were pared down in the second quarter is anyone's guess. The best idea I can offer is the possibility that the coronavirus pandemic may hurt consumer spending in the U.S. for a longer period of time than analysts are predicting. Since these two companies are reliant on merchant fees and gross dollar volume traversing their networks, this would lead to a decline in revenue and profitability in the near term.
But there are three key things investors need to know about Visa and Mastercard. First, these companies solely focus on facilitating cashless transactions and not lending. When recessions strike and loan delinquency rates rise, Visa and Mastercard aren't directly hit. This allows them to rebound from economic hiccups much faster than other payment facilitators.
Secondly, periods of economic expansion tend to last substantially longer than recessions. The latest bull market saw Visa and Mastercard record an increased gross dollar amount crossing their respective networks every year in the previous decade. Buying either of these payment facilitators is simply a bet on the growth of the U.S. and global economy.
Third and finally, Visa and Mastercard still have a long growth runway outside the United States. Globally, more than 80% of all transactions are still being conducted in cash. This means regions like Southeast Asia, Africa, and the Middle East can offer double-digit long-term growth potential.
Even though Buffett is selling shares of this dynamic duo, you should consider buying.