When it comes to investing prowess, Warren Buffett is in a class of his own. Since taking the helm of conglomerate Berkshire Hathaway (BRK.A 1.58%) (BRK.B 1.20%) in 1965, he's helped deliver an average annual return to shareholders of 20%. That's 56 years and an average annual return of 20% over those 56 years! Taking into account the year-to-date gain from the Class A shares (BRK.A), Buffett has overseen a nearly 3,400,000% return in Berkshire Hathaway's stock while CEO.
Suffice it to say, when Warren Buffett buys, adds to, reduces, or sells out of a stock, Wall Street and the investing community pay very close attention. On Monday, Aug. 16, investors received their latest peek under the hood.
Berkshire Hathaway was a net-seller of stocks in Q2
Companies and individuals managing at least $100 million in assets are required to file Form 13F with the Securities and Exchange Commission 45 days after a quarter has ended. A 13F provides a (dated) snapshot of what institutional investors, hedge funds, or market mavens were holding as of the end of the most recent quarter (June 30).
Berkshire Hathaway's latest 13F showed a considerable amount of selling, rather than buying. In total, four stocks were purchased or added to during the second quarter, with the biggest buy being grocery chain Kroger. More than 10.7 million shares were added, boosting Berkshire Hathaway's stake to almost 61.8 million shares.
On the other hand, 11 stocks were reduced or completely given the heave-ho. Axalta Coating Systems, Berkshire Hathaway's only exposure to the materials sector, was completely sold. Additionally, the Oracle of Omaha and his investing team sent Biogen and Liberty Global (Class A, LBTYA) packing. Note, Berkshire still owns a reduced stake in Liberty Global's Class C shares (LBTYK).
But among the eight other holdings that were reduced are three stocks that investors should be buying hand over fist. Buffett and his investing lieutenants may have an impressive track record, but they're not infallible.
First up is auto stock General Motors (GM -0.12%), which has been consistently trimmed in recent quarters. During the second quarter, Buffett and his team reduced Berkshire's GM stake by 7 million shares, leaving the company with 60 million shares.
Why reduce the General Motors stake? One possibility is persistent supply chain disruption caused by the coronavirus pandemic. Chip shortages have caused automakers to halt or reduce production of certain models, which should adversely affect their operating performance in the near term.
Another possible reason Buffett or his investing lieutenants, Todd Combs and Ted Weschler, may have chosen to lighten the load is GM's valuation. Since emerging from bankruptcy over a decade ago, GM's market cap was never higher than it was during the second quarter (a peak of $92 billion).
But whatever the reasoning is, selling shares of General Motors isn't a smart move. If anything, General Motors is more attractive now than it's been in over a decade. That's because it's going to benefit from a multi-decade vehicle replacement cycle as consumers and enterprises go electric.
In mid-June, General Motors announced its plans to up spending on electric vehicles (EV), autonomous vehicles, and battery technology to $35 billion through 2025. That's a 75% increase from its previous spending commitment on clean-energy solutions from prior to the pandemic. The expectation is that GM will launch 30 new EVs worldwide by mid-decade.
General Motors also has significant inroads in China, the world's largest auto market. With a number of established brands in the Chinese market and the infrastructure necessary to ramp up production, GM shouldn't have any issue gobbling up EV market share.
Currently valued at less than 8 times Wall Street's earnings-per-share forecast for 2022, GM is a screaming buy.
Another surefire winner that was, once again, reduced very modestly by Buffett and his team during the quarter is regional bank stock U.S. Bancorp (USB 0.05%). In total, 798,178 shares were sold, equating to a 0.6% reduction from its first-quarter stake. All told, Berkshire Hathaway still holds almost 128.9 million shares of U.S. Bancorp.
If you're looking for a valid reason why 798,178 shares were sold during the second quarter, the best guess I can offer is Berkshire Hathaway wanting to keep away from the 10% ownership threshold for banks that would qualify it as a bank holding company (BHC). As a BHC, Berkshire's reporting and trading activity would be considerably more stringent than it is now. Perhaps Buffett was anticipating Berkshire's stake in U.S. Bancorp growing due to future buybacks.
But like GM, it really doesn't matter why Buffett sold. Right now, U.S. Bancorp is one of the most attractive bank stocks investors can buy.
To start with, it's consistently near the top or leading big banks in return on assets (ROA). Whereas most banks strive for a 1% ROA, U.S. Bancorp has a knack for delivering a 1.6% ROA, which is indicative of its fantastic management team. This is a company that's stuck true to the bread-and-butter of banking (i.e., loan and deposit growth), and has generally avoided the riskier derivative investment opportunities that ravaged money-center banks during the Great Recession.
Furthermore, U.S. Bancorp is a banking leader when it comes to digital adoption. Approximately 79% of its customers were active digitally (online or mobile) in the May-ended quarter, which is up 7 percentage points from the comparable quarter two years prior. What's more, nearly two-thirds of all loan sales were completed online or via mobile app since 2021 began.
As one of the nation's most efficient banks, U.S. Bancorp is set to thrive as the U.S. economic recovery takes shape.
Bristol Myers Squibb
A third stock Berkshire Hathaway reduced in the second quarter is pharmaceutical giant Bristol Myers Squibb (BMY 0.53%). A little over 4.7 million shares were sold, which ultimately reduced Buffett's company's stake by 15% to roughly 26.3 million shares.
Before diving into the "why?" part of the selling process, it's important to note that this position is almost certainly the responsibility of Buffett's investing lieutenants. The Oracle of Omaha has never had the interest or energy to keep up with clinical trials, which is a big reason he's generally avoided drugmakers over the years.
As for why the Bristol Myers position was cut by 15%, there are two possible explanations. First, the company has stalled out around $70 a share on two previous occasions (1999 and 2016). With the company pushing back into the mid-$60 range in the second quarter, perhaps Combs and Weschler felt it was a prudent time to lock in some gains.
The second possibility is that Bristol Myers Squibb was purchased as a coronavirus play, and it simply hasn't materialized as one.
Not to sound like a broken record, but whatever the reasoning is, selling Bristol Myers Squibb at less than 9 times forward-year earnings is a mistake. This is a healthcare stock investors should be buying hand over fist.
On the organic growth front, Bristol Myers is making waves. Eliquis, which was developed in combination with Pfizer, has become the leading oral anticoagulant and is on track for more than $10 billion in annual sales. Meanwhile, cancer immunotherapy Opdivo brought in $7 billion last year and is being examined in dozens of clinical trials as a monotherapy or combination treatment. Label expansion opportunities offer ample upside for Opdivo.
Bristol Myers Squibb also turned heads with its 2019 acquisition of cancer and immunology drugmaker Celgene. Buying Celgene brought one of the world's top-selling cancer drugs, Revlimid, into the fold. Revlimid's annual sales have grown by a double-digit percentage for more than a decade, with the multiple myeloma drug benefiting from improved cancer-screening diagnostics, strong pricing power, increased duration of use, and label expansions. Since it's protected from a flood of generic competition until February 2026, Bristol Myers has a long runway to reap the rewards of its new cash cow.