Watching the best investors provides terrific insight. Purchases and sales of stocks made by active institutional investors reveal how they see the market and the economy. However, it's important to remember that these investors have different goals, time frames, and resources than most of us, so it isn't practical to mirror their every move.
Warren Buffett's illustrious investing holding company Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) has made interesting trades lately; upping its stake in oil stocks with Occidental Petroleum (OXY -0.09%), opening a new banking position in Citigroup (C -0.32%), and continuing to build its monster stake in Apple (AAPL 1.27%). Let's take a closer look.
A little more at the pump, a lot more in your retirement account?
Gas prices have come down a bit but continue causing Americans pain at the pump. High gas prices are no fun, but investors can use sky-high oil prices to their advantage with energy stocks. Oil stocks typically pay hefty dividends and earn tons of cash flow when fuel prices rise.
Berkshire's Occidental Petroleum purchases have demanded tons of coverage. The conglomerate upped its stake in the oil exploration and production company to nearly 20%. Once its stake reaches 20%, Berkshire will report the investment differently on its books because of accounting regulations.
What does this mean for us? Two things:
- Berkshire believes Occidental will report excellent results moving forward (great!).
- Their large purchases might stop or slow once the 20% threshold is reached (not so great).
Occidental's purchase of Anadarko Petroleum in 2019 created massive debt. The pandemic followed, and Occidental slashed the dividend from $0.79 quarterly to just a token penny. The dividend is finally back up to $0.13 quarterly and may soar.
The spike in oil prices comes at an opportune time. The increased cash flow should enable the company to pay the debt and raise the dividend. The debt has been steadily ticking down, as shown in the chart.
Data by YCharts.
Occidental stock is appropriate for investors with at least moderate risk tolerance. For example, oil prices could fall if we have a significant recession, and Berkshire could stop buying stock soon, causing a potential dip in the share price. On the other hand, the dividend could surge if oil prices stay elevated and heartily reward long-term shareholders.
Is Citi too cheap to ignore?
Many folks were surprised when Berkshire purchased nearly $3 billion in Citigroup stock in Q1 2022. Citi's stock still trades well below its pre-pandemic price and has lagged peers like Bank of America and JPMorgan Chase. The low valuation is attractive.
Citi trades at a price-to-book value well below peers and offers the highest dividend yield, as shown in the chart.
Data by YCharts.
Interest rates are rising, which is a double-edged sword for banks. Higher rates mean more interest revenue. But if rate hikes plunge the country into a recession, the slowdown could hurt results.
Purchasing Citigroup is a bet that interest rates will rise and that the economic slowdown will be fairly mild. The low price-to-book valuation offers a margin of safety, and the yield is enticing for income investors.
Will Apple continue to shine?
Apple stock has returned 325% over the past five years, compared to 71% for the S&P 500, dividends included. The past gains are tremendous, but the elephant in the room is a potential slowdown in consumer spending. Consumer sentiment is lower now than it was during the Great Recession and the pandemic.
Data by YCharts.
For a high-end electronics producer like Apple, this could spell trouble.
Berkshire doesn't appear concerned, as more than 40% of its portfolio is Apple stock. There are obvious reasons why: tremendous profits, a dedicated customer base, and excellent management, to name a few.
Apple produces a boatload of cash each period and returns much of it to shareholders through stock buybacks and dividends. Stock buybacks become more pronounced when the stock price dips because Apple can repurchase more shares for the same cost boosting shareholders' profits when the stock goes back up.
Since fiscal 2019, $318 billion has been returned to shareholders, amounting to 13% of the current market cap. As shown in the chart, Apple is slightly ahead of last year's brisk pace this fiscal year.
Data source: Company filings. Chart by author.
Sales, profits, and cash generated from operations are all up this fiscal year. Apple has the fundamentals and clout to withstand a short-term dip in consumer spending, so it's easy to see why it's a Buffett favorite.
Individuals shouldn't try to mirror actively managed portfolios trade-for-trade. After all, institutional investors don't report trades in real-time and have different goals. But they do give us clues as to what the best minds think. If you're a long-term investor, these diverse stocks could be right for you.
