With the market having a brutal start to the year, and Berkshire Hathaway (BRK.A -0.49%) (BRK.B -0.39%) stock outperforming on a relative basis, Warren Buffett has seemingly switched gears from repurchasing Berkshire's stock to buying shares of public equities, after a long dry spell. Berkshire spent $51.1 billion on U.S. equities in the first quarter, versus $9.7 in sales. And we also know Berkshire continued to purchase stocks in April, buying an 11.5% stake HP Inc. (HPQ -0.11%), which had to be disclosed.
We know Buffett was buying lots of oil stocks in the first quarter and into April, and there are indications that another $10 billion went to financial stocks and another $600 million into Apple. Buffett is also playing merger arbitrage currently, with a $5.6 billion bet that Activision Blizzard will soon be acquired by Microsoft.
Given the sell-off in technology and consumer discretionary stocks in the first quarter, these sectors could be next, with the following names potentially on Buffett's buy list.
Alphabet
Alphabet (GOOG 9.95%) (GOOGL 10.27%) sold off after its first-quarter earnings release, but its figures didn't seem bad at all. Although YouTube revenue came in lower than expected, Search and cloud revenue both beat expectations. Search is Alphabet's most important segment as the company's main profit center, while cloud computing is perhaps an underappreciated long-term opportunity. So those two key businesses seem to be strong.
YouTube makes up only about 10% of Alphabet's revenues, and it's feeling competitive pressure from TikTok, as well as difficult comparisons to the last big pandemic-affected quarter. Alphabet's equity holdings in its venture capital wing also had to marked down amid the sell-off, hurting the bottom line worse than its own operating earnings.
Still, Alphabet's Search business has a very wide moat, and the company generate lots of free cash flow. That's in spite of continuing losses in the "other bets" segment, which includes long-term futuristic bets such as Waymo self-driving cars.
Although the other bets losses could turn Buffett off, Alphabet's management has become more shareholder-friendly in recent years, steadily increasing share buybacks, which Buffett likes. On the recent release, Alphabet just authorized a $70 billion buyback, up from last year's $50 billion program and 2019's $25 billion authorization. Meanwhile Alphabet's valuation has fallen back to just 21 times this year's earnings estimates. That's an even cheaper multiple that Alphabet had during the trough of the pandemic sell-off in 2020!
GOOG PE Ratio data by YCharts
And Alphabet is even cheaper if you factor in its large cash holdings -- about 10% of its market cap -- as well as billions in ongoing losses at cloud and other bets. Assuming those units have positive value, investors are getting the core digital ads business for a mid- to high-teens P/E multiple. That seems fairly cheap for a company like Alphabet. Buffett and partner Charlie Munger have said in the past that they "missed" buying Google, so today's low price could lure Buffett to finally buy shares, even with the nagging "other bets" losses.
Dell Technologies
While Berkshire has generally shied away from technology stocks in the past, Buffett and his managers Todd Combs and Ted Wechsler have made a few technology bets in recent years. Apple is now Berkshire's biggest position, and we know someone at Berkshire bought a lot of HP stock in April.
If Berkshire likes the lowly valued hardware producer HP, why not Dell? Both companies make similar products in desktops and PCs, and both trade at bargain basement valuations. In addition to PCs, desktops, and peripherals, Dell (DELL 0.29%) also makes enterprise servers, while HP makes printers. Like HP, Dell trades at under seven times earnings, and it recently implemented a dividend that yields over 2.8%.
Image source: Getty Images.
Unlike HP, Dell should benefit from its enterprise exposure this year. It has a large portion of its computer segment going to enterprises, rather than consumers. With enterprise spending seemingly strong even as consumers pull back on low-end PC purchases, Dell's financial results should remain relatively resilient this year compared with other PC-makers.
Dell is also leveraging its large size and incumbency in enterprise servers to develop hardware solutions in close partnership with leading cloud providers, such as Snowflake (SNOW 3.93%). Dell and Snowflake, another Berkshire holding, just announced a close partnership to make it easier to work with data stored in on-premise data centers on Dell servers with Snowflake's cloud data lake. The two plan to integrate products and undertake joint marketing in the second half of this year.
While Dell may seem like a dinosaur and unexciting hardware maker to some, its size and execution is allowing it to benefit from increased digitization across the enterprise. With a bargain-basement valuation, I could see Buffett scooping up shares to complement the HP stake.
RH
This one is cheating a little bit, as Berkshire already owns $1.8 billion of RH (RH 2.04%) stock, formerly known as Restoration Hardware. It's likely that one of Buffett's other managers bought it, as the position makes up only 0.2% of Berkshire's equity portfolio.. However, Berkshire's Apple buy also started out as a purchase by either Todd Combs or Ted Wechsler, so who's to say whether Buffett won't buy more of RH himself?
RH soared after Berkshire bought shares back in 2019, but shares have since fallen more than 50% from their highs, as the pandemic-era boom in home furniture sales have slowed. High inflation is raising costs for RH and squeezing the consumer, which may pull back on discretionary purchases of large durable goods. CEO Gary Friedman basically said as much on last quarter's perilous earnings call.
However, Friedman is also turning RH into a luxury brand, selling fewer items at higher prices to richer people. A few years ago, the company began closing its smaller mall-like stores to open giant flagship multi-story design galleries, complete with restaurants, coffee shops, and full-service staff. The new strategy turns its showrooms into museum-like places, elevating RH's furniture offerings to feel as if they are works of art.
The strategy has been successful, with RH's margins doubling over the past two years. In addition, RH is expanding its brand geographically to Europe this year, and is also opening RH-branded restaurants, hotels, homes, and chartered planes and yachts.
Trading at just 13.5 times this year's earnings estimates, expectations now seem rather low for RH. Yet luxury brands tend to trade at higher multiples than that, since they are usually immune from economic cycles and carry pricing power with their well-off clientele. However, since RH is transitioning from more of a mass brand to a luxury brand, investors aren't willing to give it full credit just yet.
If RH's results stay resilient in a tougher economy, I could see Buffett eying this brand as a luxury complement to Berkshire's low-cost furniture business, the Nebraska Furniture Mart.
