If you've ever wondered why everyone -- from professional money managers with decades of experience to novice investors -- pays close attention to what stocks billionaire Warren Buffett buys and sells, look no further than his track record.
Since taking the reins as Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) CEO in 1965, the Oracle of Omaha, as he's come to be known, has overseen the creation of $615 billion in shareholder value and delivered an average annual return of 20.1% for his company's Class A shares (BRK.A). To put these gains into perspective, Berkshire Hathaway's shares could fall 99% tomorrow, yet would still be handily outperforming the benchmark S&P 500, inclusive of dividends paid, since the beginning of 1965.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett's illustrious track record necessitates investors to pay attention to where he's putting Berkshire Hathaway's capital to work. Thankfully, quarterly filings with the Securities and Exchange Commission make this task relatively easy.
Over the past six years, Buffett has deployed $118 billion of his company's capital, in aggregate, to buy three stocks.
Chevron: $23.3 billion (estimated)
The first stock Buffett and his team and have fallen head over heels in love with is integrated oil and gas giant Chevron (CVX 0.57%).
Although Buffett's annual letter to shareholders lays out the company's cost basis for its largest holdings, the bulk of Berkshire's buying activity for Chevron occurred during the first quarter of 2022 (i.e., after the shareholder letter came out). Based on an estimated per-share cost basis of $146.56, per WhaleWisdom.com, Buffett has spent approximately $23.3 billion purchasing close to 159.2 million shares of Chevron.
The likeliest reason for the Oracle of Omaha to pile more than $23 billion of Berkshire Hathaway's cash into Chevron is the expectation that crude oil and natural gas prices will remain elevated for the foreseeable future. Because of a historic oil and natural gas demand drawdown experienced during the pandemic, most drillers, midstream companies, and refiners, pared down their investments. Couple this with ongoing energy supply chain disruption tied to Russia's invasion of Ukraine, and you have a recipe for sustainably higher energy prices.
Another reason for Buffett's bullishness on Chevron is its integrated operating model. It's no secret that Chevron's upstream drilling segment generates the bulk of its profits. But as an integrated energy company, it also operates midstream (e.g., transmission pipelines and storage) and downstream assets (e.g., refineries and chemicals). If the price of oil and/or natural gas significantly declines, it allows the company's downstream operations to take advantage of lower input costs. This ability to hedge puts Chevron on sturdier ground than the majority of its peers.
And let's not overlook Buffett's love of a hearty capital return program. Chevron expects to repurchase $10 billion worth of its common stock before the end of 2022, and is doling out a 3.5% yield.
Image source: Apple.
Apple: $33.8 billion (estimated)
The second stock Buffett and his investing team have been enamored with since the start of 2016 is tech kingpin Apple (AAPL 0.64%).
When the closing bell tolled on Wednesday, June 15, nearly 39% ($123.4 billion) of Berkshire Hathaway's $317.4 billion investment portfolio was tied up in shares of Apple. Considering that Buffett purchased close to 3.8 million additional shares of the company during the first quarter, and we don't know the exact purchase price of these shares, the aggregate estimated value of Berkshire's purchases of Apple total roughly $33.8 billion over six years.
In Buffett's eyes, Apple is a major valuation determinant of his company. It's also a holding that checks all the appropriate boxes for long-term investors.
Apple is one of the most-recognized brands in the world, with one of the most loyal customer bases. Anytime a new product is released, you'll often see lines wrapped around its retail locations. This illustrates how putting innovation first has helped the United States' largest publicly traded company by market cap consistently grow its top and bottom line.
Another selling point for Apple is CEO Tim Cook's oversight. Cook is overseeing his company's transition to a services-oriented operating model. While this doesn't mean Apple is abandoning the products that made it the great company it is today, this evolution to services will boost operating margins, further improve brand loyalty, and minimize the sales lumpiness often associated with product replacement cycles.
And I have I mentioned that Buffett loves a good capital return program? Since the beginning of 2013, Apple has repurchased just shy of $500 billion worth of its own common stock. It also sports one of the highest nominal dividend payouts on the planet (about $14.9 billion paid annually).
Berkshire Hathaway: $61.1 billion
But the under-the-radar stock Buffett and his right-hand man, Charlie Munger, have sunk more money into over the past six years -- even more than Chevron and Apple combined -- is (drum roll) Berkshire Hathaway.
Before July 2018, Buffett and Munger were only able to repurchase shares of their company if they fell to, or below, 120% of book value (i.e., no more than 20% above book value). In the half-decade leading up to 2018, Berkshire Hathaway's shares never came close to 120% of book value, resulting in no shares being repurchased.
But things changed on July 17, 2018. Berkshire Hathaway's board passed new measures that gave Buffett and Munger the ability to more easily deploy the company's capital for buybacks. The new provisions require that:
- Berkshire Hathaway must have $20 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet.
- Buffett and Munger must agree that Berkshire Hathaway shares are trading at a discount to their intrinsic value.
Since this change was made in July 2018, Buffett and Munger have overseen the repurchase of $61.1 billion worth of their company's Class A (BRK.A) and Class B (BRK.B) shares.
As a reminder, when a company repurchases its own common stock, it tends to have a positive impact for shareholders. With fewer shares outstanding, companies with steady or rising profits will typically see their earnings per share increase. That can make a publicly traded company look more attractive to current and prospective investors.
If the recent bear market sell-off in the S&P 500 and Nasdaq Composite were to ramp up, it wouldn't be a surprise if Buffett responded by repurchasing even more shares of his company's stock.
