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The Oracle of Omaha is putting tens of billions of dollars to work in three specific sectors.
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When Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett makes a move, Wall Street and investors rightly pay close attention. That's because the Oracle of Omaha's investing track record is practically unmatched over the past six decades.
Since becoming CEO in 1965, Buffett has created more than $600 billion in value for his company's shareholders, and has nearly doubled up the average annual return of the benchmark S&P 500, including dividends (20.1% annualized for Berkshire's Class A shares (BRK.A) versus 10.5% for the S&P 500). For added content, Berkshire Hathaway's stock could lose 99% of its value and Buffett's company would still be handily outperforming the S&P 500 since 1965.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
With the S&P 500 currently entrenched in a bear market, Buffett has had ample opportunity to put some of his company's vast treasure chest of capital to work. In particular, he's been increasing Berkshire Hathaway's bets big-time in three sectors.
The first sector Buffett has demonstrated an insatiable appetite for of late is energy. More specifically, Buffett can't stop buying integrated oil and natural gas stocks Chevron (CVX +0.00%) and Occidental Petroleum (OXY +0.01%). Berkshire Hathaway added more than 120.9 million shares of Chevron during the first quarter and has made numerous additional purchases to its stake in Occidental.
The most logical reason for Buffett and his investing team to pile into energy stocks is the belief that energy commodity prices will remain elevated for years. Most major energy companies had to pare back their capital expenditures during the pandemic. This lack of investment, coupled with Russia's invasion of Ukraine, threatens to throw a monkey wrench into the global energy supply chain for years. Companies with upstream drilling and exploration segments should benefit nicely from elevated oil, natural gas, and natural gas liquids pricing.
However, Chevron and Occidental are both integrated energy companies. This means that, in addition to their higher-margin upstream drilling segments, they operate midstream (e.g., transmission pipelines and/or storage) and downstream assets (e.g., chemical plants and/or refineries). If, for instance, the price of crude oil were to continue to back off of its multidecade high, this would lower input costs for Chevron's and Occidental's downstream assets, which, with added demand, can lift operating margins.
Although Buffett has piled into Chevron and Occidental Petroleum, it should be noted that Chevron is in far better financial shape. Occidental's acquisition of Anadarko in 2019 left the company bloated with debt. While historically high commodity prices are helping Occidental reduce its debt and strengthen its balance sheet, Chevron offers far more financial flexibility right now.
A second sector that Warren Buffett is increasing his bets on big-time is technology. That might come as a bit of a surprise given that the Oracle of Omaha hasn't always had the best track record when investing in tech stocks. However, recent buying activity certainly shows an affinity for tech-driven innovation.
During the first quarter, Berkshire Hathaway increased its position in Apple (AAPL +0.01%) by close to 3.8 million shares. Perhaps even more shocking was Buffett's company's reveal that it had taken a nearly 121 million-share position in personal computer and printing solutions company HP (HPQ +0.05%).
Although it might seem as if the Oracle of Omaha has a new-found love for tech stocks, this buying activity likely has more to do with value investing and brand awareness than anything else.
With regard to Apple, Buffett has plainly acknowledged that it's one of Berkshire's pillars. It's a company with an extremely loyal customer base, a well-recognized brand, and it's relied on innovation to drive its sales and profits to record levels. Even though Apple's growth strategy now centers on higher-margin subscription services, the company continues to be a leader in product innovation (e.g., the iPhone accounted for half of all U.S. smartphone share in the first quarter).
As for HP, the driving force looks to be valuation. Though the growth heyday for laptops and printers has long since passed, consumer and enterprise demand for desktops and laptops remains surprisingly transparent. At just 7 times Wall Street's forecast earnings for 2022 and 2023, there looks to be a safe floor beneath the shares of HP.
These tech stocks have also been an excellent source of capital returns. Apple has repurchased almost $500 billion worth of its own stock since the beginning of 2013, while HP returned $1.3 billion to shareholders through its dividend and buyback program in the most recent quarter.
Image source: Getty Images.
Last but not least, Buffett has been beefing up Berkshire Hathaway's bets on the financial sector. During the first quarter, Buffett's company bought over 55 million shares of money-center bank Citigroup (C +0.00%), and opened stakes in Ally Financial (ALLY +0.00%) and conglomerate Markel.
Buying stakes in bank stocks and insurance companies is nothing new for the Oracle of Omaha. In fact, it's probably the least surprising thing he's done in 2022. Buffett is well aware that recessions are an inevitable part of the U.S. economy. But rather than trying to time when downturns will occur, he understands that periods of expansion last disproportionately longer than recessions. Thus, buying bank and insurance stocks allows Buffett's company to take advantage of the natural expansion of the U.S. and global economy over time.
Another reason to love financial stocks right now is the Federal Reserve's aggressive monetary policy shift. With the U.S. inflation rate hitting a four-decade high of 9.1% in June, the nation's central bank has no choice but to aggressively raise interest rates. Banks like Citigroup and Ally Financial should generate more net-interest income from the variable-rate loans they respectively have outstanding.
Aside from the expectation that bank earnings will rise on the heels of hawkish monetary policy, Buffett and right-hand man Charlie Munger haven't been afraid to pull the trigger on repurchasing more shares of their own company. Since the Berkshire Hathaway board of directors adjusted the company's stock buyback parameters in July 2018, Buffett and Munger have overseen the repurchase of more than $61 billion worth of Berkshire Hathaway's Class A and B shares.
If there's one sector you can pretty much always count on to see Buffett betting big on, it's financials.