Since 1965, Berkshire Hathaway has averaged a compound annual return of 20.3%, which is more than double the total return, inclusive of dividends paid, of 10% for the benchmark S&P 500. In aggregate, a $100 investment in Buffett's company in 1965 would have been worth more than $2.7 million by the end of 2019. Buffett's ability to pick businesses with sustainable competitive advantages and his resolve to hold these companies for a long time have yielded success.
The $64,000 question is, "What have Buffett and his team been up to lately?"
A concrete answer will have to wait until Berkshire Hathaway releases its Form 13F filing with the Securities and Exchange Commission (SEC) late next week, but we have enough information to partially answer this question and speculate on the rest.
Buffett and his team definitely added two stocks in Q3
Though Berkshire Hathaway isn't required to report all of its buying and selling activity until it files its 13F with the SEC, some of its activity has been made public through regulatory filings. Of the six moves we know were made during the third quarter, two were purchases.
Bank of America
First of all, Buffett has been a big buyer of Bank of America (NYSE:BAC) stock. Berkshire Hathaway now owns more than 1 billion shares of the money-center giant, with an overall stake of almost 12%.
Berkshire Hathaway usually doesn't increase its ownership stake in a bank stock above 10% because doing so could have it labeled as a bank holding company (BHC). A BHC could have a number of restrictions placed on it by the Federal Reserve, so the 10% cap is a line in the sand that Buffett rarely crosses. However, Buffett received the OK from the Federal Reserve Bank of Richmond to increase its stake to as much as 24.9% without being labeled a BHC -- and the Oracle of Omaha has taken advantage of that ability to buy more BofA stock.
On a more company-specific level, Bank of America happens to be the most interest-sensitive of all big banks, meaning it'll see the biggest uptick in interest income when the Fed begins expanding its federal funds target rate by mid-decade.
Furthermore, BofA has done a good job of improving digital engagement and consolidating its branches to keep costs down. It's the perfect cyclical play from Buffett's favorite industry.
The second company we know that Buffett and his team added in the third quarter is software-as-a-service stock Snowflake (NYSE:SNOW), which debuted via initial public offering in September. Berkshire Hathaway was able to get its hands on more than 6.1 million shares of the company at its IPO list price of $120.
To be crystal clear, this wasn't a purchase orchestrated by the Oracle of Omaha. Chances are that Buffett has no clue what Snowflake's cloud software does for its customers. But since it's a holding in Berkshire Hathaway's portfolio, it's going to be labeled a "Buffett stock."
Aside from its hypergrowth potential, Snowflake is such an intriguing company in its layered solutions approach. Snowflake's cloud solutions are built atop the infrastructure of the most popular companies, such as Amazon S3 and Google Cloud (Google is a subsidiary of Alphabet). Individually, it's difficult to share information across these platforms. But being layered atop these popular infrastructure services allows Snowflake customers to easily share data housed in their clouds.
Additionally, Snowflake doesn't offer a subscription-based operating model. Instead, it has a pay-as-you-go structure that charges its clients based on how much storage they need and how many Snowflake Compute Credits they use. This makes for highly transparent expensing.
Snowflake is thus the fastest-growing stock in Berkshire Hathaway's portfolio.
Here's what Buffett may have bought in Q3
What else did Buffett buy in the third quarter? We'll know more in less than two weeks, but I suspect he and his team added to three existing holdings.
The first is mining stock Barrick Gold (NYSE:GOLD), which was first bought in the second quarter. Historically, companies held by Berkshire Hathaway have their positions built up over time, which would make Barrick a logical addition in the September-ended quarter. Further, the outlook for gold has arguably never been better. Barrick Gold has done a good job of reducing its net debt and taking advantage of improved operating efficiency at its core mines.
I'd also look for Buffett to add to Berkshire Hathaway's stake in the Bank of New York Mellon (NYSE:BK). Even though more than 7 million shares of custodial bank BNY Mellon were sold in the previous quarter, this move seemed to have more to do with keeping under the 10% stakeholder limit than anything else. It's possible that Buffett's investing lieutenants aren't thrilled with BNY Mellon's prospects given a persistently low interest rate environment, but at 78% of book value, this has the look of a bargain that Buffett wouldn't pass up.
A third stock I'd bet Buffett and his team added to during Q3 is grocer Kroger (NYSE:KR). Kroger is an exceptionally safe stock given the volatility we've witnessed in recent weeks, and delivers predictable growth. It also allows Berkshire Hathaway to hedge against the coronavirus disease 2019 (COVID-19) by getting worse and potentially forcing state-level lockdowns. When combined with Kroger's digital initiatives to promote online sales, Kroger has the tools to deliver for its shareholders.