When Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.37%) CEO Warren Buffett speaks, Wall Street and retail investors listen. That's because Berkshire Hathaway's share price has risen by an annual average of 20% since the mid-1960s under his leadership.
Last week, the Oracle of Omaha's company filed a Form 13F with the Securities and Exchange Commission. This required quarterly filing serves as a snapshot of what Buffett's company bought and sold during the first quarter. All told, Berkshire Hathaway initiated or added to five positions and completely sold or reduced 13 holdings.
Though Buffett's track record speaks for itself, he's not perfect. Of the 13 stocks that were reduced or exited completely, five stand out as intriguing values that investors should be buying, not selling.
In general, Buffett has never been a big fan of pharmaceutical stocks. He simply doesn't have the time or drive to keep up with clinical trial results and patent exclusivity timelines. This means Berkshire Hathaway's push into Big Pharma over the past year has probably been influenced by Buffett's investment lieutenants, Todd Combs and Ted Weschler.
In the first quarter, Berkshire dumped 10.8 million shares of drugmaker Merck (MRK 1.28%). This doesn't seem wise, especially with shares valued at a very reasonable 11 times forward-year earnings, based on Wall Street's consensus earnings-per-share estimate.
Merck's superstar continues to be cancer immunotherapy Keytruda, which has been given the green light by the U.S. Food and Drug Administration for two dozen indications. Last year, during the worst economic downturn in decades, Keytruda delivered 30% growth and $14.4 billion in sales. With Keytruda benefiting from label expansion opportunities, improved cancer-screening diagnostics, longer duration of use, and strong pricing power, it could become the world's top-selling drug within a few years.
Also, don't overlook Merck's animal health division, which grew sales by a blazing 17% in the first quarter. Livestock may be the biggest revenue generator within animal health for the time being, but the fastest growth is coming from companion animal therapies. Pet owners will spend big bucks to keep their four-legged family members healthy.
Cue the Rodney Dangerfield standup comedy special, because satellite-radio operator Sirius XM (SIRI) can't get any respect. In the first quarter, Buffett's company unloaded around 6.3 million shares, or 12% of its previous holdings.
Although the satellite radio space isn't the high-growth trend it once was, Sirius XM offers a couple of strategic advantages that make it a high-quality stock to own. For instance, Sirius XM is in a much better position to navigate its way through inevitable economic contractions and recessions than its peers. Whereas the bulk of terrestrial and online radio operators lean almost exclusively on advertising for revenue, ad sales dry up quickly when recessions occur. Sirius XM generated 78% of its revenue in the first quarter from subscriptions. History has shown that subscribing customers are unlikely to cancel during temporary economic disruptions.
What's more, Sirius XM also benefits from a number of relatively fixed or only slightly variable costs. As an example, it doesn't matter how many net new subscribers sign up, the company will still be paying the same transmission fees and have, more or less, the same equipment costs. Though royalty and talent acquisition costs can vary, this operating model is set up for margin expansion over the long run.
High-yield drug stock AbbVie (ABBV 2.75%) was yet another healthcare stock to get reduced in the first quarter. Berkshire Hathaway cut its holdings in the company by 10% (close to 2.7 million shares) from the sequential fourth quarter. But sticking with the theme, I don't believe this was a smart idea.
There's no question that AbbVie will face challenges in its future. It currently has the top-selling drug in the world in its portfolio, Humira. This well-known anti-inflammatory brought in $19.8 billion in sales in 2020 and accounted for about 43% of AbbVie's total revenue. Beginning in 2023, biosimilars to Humira will begin hitting pharmacy shelves in the U.S., potentially hurting sales. Yet, Humira is such a well-known drug with multiple label indications that it can remain a cash cow for many years to come.
AbbVie has done a good job of diversifying its product portfolio via acquisitions, as well. Last year, AbbVie purchased Allergan, which brought new therapeutics into the fold, improved its global distribution, and is expected to result in more than $2 billion in annual cost synergies.
The point is this: AbbVie generated more than $18 billion in operating cash flow over the trailing year and it can be scooped up for a reasonable nine times forward-year earnings.
Warren Buffett and his team also pumped the brakes on auto stock General Motors (GM 0.41%). Berkshire's 13F shows 5.5 million shares were sold, which reduced the remaining stake in GM to 67 million shares.
The primary buzz surrounding GM, and the reason it remains a stock to own in the auto industry, is the company's push into electric vehicles (EVs) and autonomous driving technology. Previously, the company had laid out plans to spend $20 billion through 2025 on alternative energy technology. But in November 2020, General Motors upped its commitment to $27 billion through mid-decade. In total, it plans to launch 30 EVs worldwide. This is a company with over a century of history behind its brand, meaning it should have no trouble entertaining a global audience for its EVs.
Equally encouraging is the momentum GM has seen in China, the world's largest auto market. Despite losing U.S. market share, GM's stake in the Asia/Pacific, Middle East, and Africa segment rose 70 basis points in the first quarter to 7.5%. Sales of Cadillac more than doubled in the region to 60,000 vehicles, with Buick vehicle sales up 73% to 225,000. By 2035, around half of all new vehicle sales in China could be electric, which marks a massive opportunity for GM.
It remains a bargain at a tad over eight times Wall Street's forward-year consensus profit estimate.
Bristol Myers Squibb
To round things out, we have what might be the most attractive value stock of all that Buffett and his team have been selling: Big Pharma Bristol Myers Squibb (BMY 1.24%). During the first quarter, Berkshire Hathaway jettisoned 2.3 million shares, which reduced its total holdings in the company by 6% to about 31 million shares.
The thing to really appreciate about Bristol Myers is that it's growing organically and inorganically. Speaking of the former, it has the world's leading oral anticoagulant (Eliquis) in its portfolio, and is likely to see another bump in sales growth from cancer immunotherapy Opdivo. Even though Opdivo's sales stalled out at $7 billion in 2020, it's being tested in dozens of clinical trials as a monotherapy and combination treatment. If just a small fraction of these are successful, Opdivo will still offer significant sales growth potential.
As noted, Bristol Myers Squibb has done an excellent job of padding its bottom line with acquisitions, too. The November 2019 buyout of Celgene should generate serious cash flow through mid-decade. That's because this acquisition brought prized multiple myeloma drug Revlimid into Bristol's portfolio. Revlimid has grown sales annually by a double-digit percentage for more than a decade. It's had its label expanded on multiple instances and has benefited from longer duration of use.
It's mind-boggling that a company this profitable can be valued at a multiple of only eight times Wall Street's projected forward-year earnings.