A knack for buying great stocks has made Warren Buffett one of the world's richest people, according to Forbes. That kind of success suggests it's smart to buy the same stocks he does. Fortunately, Warren Buffett's company, Berkshire Hathaway (BRK.A) (BRK.B), discloses its latest transactions in a 13-F filing with the Securities and Exchange Commission every three months.
Its latest filing reveals that Berkshire Hathaway's established new positions in the big-cap pharmaceutical stocks AbbVie, Bristol Myers Squibb, Merck, and Pfizer. It also established new positions in T-Mobile (TMUS) and Snowflake (SNOW). Are these stocks worth adding to your portfolio? Here's why Buffett may be a fan of these companies.
A bet on Biden or against the economy?
Warren Buffett's interest in healthcare companies suggests he thinks healthcare demand will climb under a Biden presidency, but it may also reflect growing angst over economic sluggishness caused by COVID-19's resurgence.
Joe Biden wants to expand the Affordable Care Act, legislation enabling about 20 million Americans to have health insurance. However, Biden also wants to give Medicare the ability to negotiate lower drug prices from manufacturers and that could offset tailwinds associated with insuring more people. Furthermore, the Supreme Court is currently hearing the latest challenge to Obamacare; its decision isn't expected until next summer. If the Court sides with plaintiffs, health insurance rolls could shrink.
Warren Buffett's healthcare bet may be less about election results and more about concerns that the U.S. economy will stumble if forecasts for a COVID-19 resurgence prove correct. Unfortunately, newly diagnosed COVID-19 cases are accelerating, and hospitalizations because of COVID-19 are similarly increasing. An increase in the positivity rate, or the percentage of positive cases out of all tests, caused New York City to shut down in-person education this week, hinting at a return to stricter requirements.
If things don't improve, businesses could close, causing a spike in unemployment and a corresponding decline in economic activity. In such a scenario, owning pharmaceutical stocks could be smart, because demand for drugs is less economically sensitive than demand for other goods or services.
|Berkshire Hathaway's New Pharmaceutical Stocks|
|Company||Shares Bought||Current Value|
|Bristol Myers Squibb (BMY)||29.9 million||$1.81 billion|
|AbbVie (ABBV)||21.3 million||$1.86 billion|
|Merck (MRK)||22.4 million||$1.86 billion|
|Pfizer (PFE)||3.7 million||$136 million|
Warren Buffett's decision to buy Bristol Myers Squibb, AbbVie, Merck, and Pfizer may also have been supported by their relatively favorable valuation. All four had forward price-to-earnings ratios that were near 10-year lows earlier this year, and none currently has a forward P/E ratio above 15.
Bristol Myers Squibb is the only one of the four to boast operating margins below 25%. Its operating margin is only 9%, but it has plenty of irons in the fire that could boost results in the future, including the potential approval next year of a next-generation cancer multiple myeloma drug it licensed from bluebird bio.
Arguably, AbbVie's the cheapest stock of the bunch. It's got the lowest price-to-sales, price-to-free cash flow, and price-to-earnings ratios because its best-seller, Humira, could see sales slide due to generic competition. That risk doesn't appear to concern Berkshire Hathaway, though. That might be because AbbVie is managing its Humira risk by cutting licensing deals with drugmakers to control generic drug launches.
There's good reason to own Merck, too. Its cancer drug, Keytruda, generated over $10 billion in revenue through the first nine months of 2020, up 30% year over year. Sales could continue growing, too, because there's a bevy of combination trials ongoing that could result in Keytruda securing approval in more indications.
Pfizer may be the most intriguing of the four now, though. This week, it claimed its COVID-19 vaccine was 95% effective, positioning it to be one of the first companies with a shot at Food and Drug Administration approval. If approved, its vaccine could add billions of dollars to its top line over the next year because Pfizer and its partner, BioNTech, have already reached a $1.95 billion agreement to supply 100 million doses to the U.S. government, with an option for another 500 million doses.
Warren Buffett's Berkshire Hathaway also became owner of 2.4 million T-Mobile shares last quarter. The stake -- worth roughly $275 million as of this writing -- is relatively small, which suggests the decision to buy was likely made by Buffett's co-managers, Todd Combs and Ted Weschler.
In April, T-Mobile completed its merger with Sprint to become the second-biggest wireless carrier in the United States. Because Sprint and T-Mobile have a lot of overlapping assets, management estimates it can unlock $43 billion in savings post-merger, significantly boosting free cash flow. Also, investments in its next-generation 5G network could allow it to move beyond wireless to eventually compete head-to-head with cable companies for internet services.
Unlike its peers, T-Mobile doesn't pay a dividend (yet), but it's nicely profitable and the only one of the big three that's a wireless pure play. AT&T owns media assets like WarnerMedia, the owner of HBO. Verizon offers fiber optic phone and cable services and it owns media properties, including Yahoo!.
An IPO home run
Finally, Berkshire Hathaway also took advantage of a red-hot market for new issues by signing up to buy $250 million shares of cloud-software darling Snowflake when it went public in September.
A provider of data storage and analysis software to over 3,000 companies worldwide, Snowflake's initial public offering, or IPO, was one of the most anticipated this year. The company's sales jumped 121% year over year to $133 million in the second quarter because of an impressive 158% net retention rate, a measure of sales among existing clients over the prior year.
Despite its growth, Snowflake only works with 146 Fortune 500 companies, suggesting there's plenty more runway to expand its business. Thanks to its potential to win more customers, its shares have soared to over $260 per share from its $120 offering price, giving Berkshire Hathaway a big win in only a little over two months. It remains to be seen if Snowflake stays in its portfolio, though. Historically, Warren Buffett has avoided technology stocks in favor of easier-to-understand businesses.