Few money managers have the investing track record that billionaire Warren Buffett brings to the table. Since taking over as CEO of conglomerate Berkshire Hathaway (BRK.A -0.58%) (BRK.B -0.46%) in 1965, he's led his company's Class A shares (BRK.A) to an average annual return of 20.1%, through Dec. 31, 2021. That's nearly double the average annual total return (10.5%) of the benchmark S&P 500 over the same time frame -- and the S&P 500's return figure includes dividends paid!
In other words, when Warren Buffett buys or sells shares of a company, everyone from novice investors to professionals with decades of experience tends to pay close attention.
Among the many positions currently held by Buffett's company, four stand out as stocks the Oracle of Omaha simply can't stop buying.
The unquestioned biggest shift in Berkshire Hathaway's portfolio in 2022 is Buffett's new-found love for energy stocks. At no point over the past 21 years -- 21 years is as far back as the sector allocator tool goes on WhaleWisdom.com -- has the energy sector accounted for such a large percentage of Buffett's portfolio. A big reason for this is the Oracle of Omaha upping his company's stake in Chevron (CVX -1.39%) by nearly 121 million shares during the first quarter.
Since Warren Buffett rarely seeks out shorter-term investments, the logical explanation for his increased stake in Chevron is the belief that energy commodity prices will remain elevated for years. There's certainly a case to be made that oil and natural gas prices will trend well above average. With major domestic and international oil and gas producers reducing capital investments during the pandemic, and Russia invading Ukraine, there's simply no quick fix to getting more supply to the market. This should bode well for longer-term oil and natural gas prices, even if short-term volatility sends energy commodities a bit lower.
Buffett is likely also a fan of Chevron's integrated operating model. Even though it generates its juiciest margins from its drilling segment, the company also operates transmission pipelines, refineries, and chemical plants. Transmission pipelines typically lean on fixed-fee or volume-based contracts, which produce highly predictable cash flow. Meanwhile, downstream refining and chemical operations typically benefit from lower input costs when crude oil prices fall. Effectively, Chevron has its bases covered.
The cherry on the sundae is that Chevron offers a robust 3.7% yield and has planned to repurchase up to $10 billion worth of its shares in 2022. Warren Buffett rarely turns down an industry leader with a sizable capital return program.
A second stock the Oracle of Omaha hasn't been able to stop adding to Berkshire Hathaway's investment portfolio is gaming company Activision Blizzard (ATVI). Buffett more than quadrupled Berkshire's stake in Activision during the first quarter and has, supposedly, continued adding, based on comments made by Buffett during his company's annual shareholder meeting.
What's particularly interesting about Buffett's Activision Blizzard stake, which stands at 9.5% of the company's outstanding shares, is it's entirely an arbitrage opportunity. In other words, it's a short-term investment.
In mid-January, software giant Microsoft (MSFT 0.92%) made a $95 all-cash offer to acquire Activision. Microsoft already has a sizable gaming presence, but is more than likely looking to add Activision to fulfill its metaverse ambitions. The "metaverse" being the next iteration of the internet that'll allow connected users to interact with one another and their surroundings in 3D virtual environments. Shares of Activision closed at $80.59 on Aug. 3, 2022, which means there's an arbitrage opportunity of nearly 18% if the deal closes.
But that's ultimately the $64,000 question: Will regulators OK the deal? The United Kingdom's antitrust entity is looking closely at the deal, with the possibility of Microsoft needing to make concessions for it to close. Only time will tell if Buffett's arbitrage play was a smart one.
Have I mentioned that Warren Buffett can't stop buying energy stocks? When the year began, Berkshire Hathaway held a $10 billion position in preferred shares of oil and gas stock Occidental Petroleum (OXY -1.00%). Now, in addition to this preferred-stock stake, which is yielding 8% annually, Buffett's company owns more than 181 million shares of Occidental's common stock.
The premise for these massive buys is similar to that of Chevron. If oil and gas prices remain elevated for the foreseeable future, Occidental Petroleum should see big upticks in its operating cash flow and profits. Even though Occidental is an integrated company like Chevron, the bulk of its profitability is tied to its drilling segment. It's, arguably, even more of a pure-play on rising oil and gas prices than Chevron.
But unlike Chevron, Occidental Petroleum's balance sheet has been a disaster for the past few years. The company's acquisition of Anadarko in 2019 (i.e., the deal where Berkshire Hathaway handed $10 billion to Occidental in exchange for preferred stock with an 8% annual yield) buried it in debt. Even with the company repaying $4.8 billion in debt in the June-ended quarter, it's still lugging around $21.7 billion in net long-term debt. While that's a $13.6 billion improvement from one year ago, the company still needs energy commodity prices to work in its favor to fully right the ship.
The added bonus for Buffett, if an 8% preferred stock yield weren't enough, is that Occidental Petroleum has begun buying back its own stock. The company retired more than 18 million shares through Aug. 1, 2022 at a cost of $1.1 billion.
The fourth stock Warren Buffett can't stop buying is (drum roll) that of his own company!
Prior to July 17, 2018, Berkshire Hathaway's share buyback rules were pretty straightforward. If Warren Buffett and his right-hand man Charlie Munger wanted to repurchase shares, Berkshire Hathaway's book value had to be 120% or lower (i.e., no higher than 20% above book value). At no point did the Oracle of Omaha's stock come close to this figure between 2012 and mid-2018.
But on July 17, 2018, Berkshire Hathaway's board of directors altered the buyback policy to two simple rules. If Berkshire Hathaway has at least $30 billion in cash and U.S. Treasuries on its balance sheet and Warren Buffett and Charlie Munger agree that their company's shares are trading well below their intrinsic value, buybacks can be made without a cap. Since mid-2018, Buffett and Munger have OK'd the repurchase of more than $61 billion worth of Berkshire's Class A and B shares, including $3.11 billion during the first quarter of 2022.
Repurchasing shares of stock helps lower the number of shares outstanding and can, with flat or growing net income, increase a company's earnings per share. In theory, an ongoing share buyback program can make a company more fundamentally attractive to Wall Street and investors.