Berkshire Hathaway (BRK.A -0.17%) (BRK.B -0.12%) reported its second-quarter results over the weekend, and the eagerly anticipated 10-Q filing with the Securities and Exchange Commission (SEC) came out on Monday. Investors love to scour it for information they might glean regarding the actions of the world-renowned value investor Warren Buffett. With stocks down in Q2, folks may have expected to see some stock buying from Buffett, but the filing showed a rather sleepy quarter for the company. What does this lack of action tell us?
A quiet quarter for the Oracle of Omaha
Berkshire's Q2 earnings report showed that Buffett and his lieutenants have been relatively muted regarding moves in the conglomerate's stock holdings. Though the filing did not specify which stocks the company bought or sold, it did point out that Berkshire purchased $6.15 billion in stock positions and sold $2.32 billion during the quarter.
To put the company's Q1 stock investments in perspective, Berkshire spent more than $51 billion on stock during the period, when the S&P 500 index was down 4.6%. Interestingly, the index fared much worse in the second quarter of 2022 than in the first, with a 16.4% decline, its worst performance since the COVID-19-stricken Q1 of 2020. Buffett watchers often point out that the he loves to buy stocks when they're down. So some may be puzzled why Berkshire spent less on stocks in the second quarter despite the stock market being so much lower.
Buffett and Berkshire Hathaway typically keep a significant amount of cash on the balance sheet. The reason is twofold. First, given Berkshire's size and its preference for owning stocks and businesses, the company needs to make large investments to have a meaningful impact on the company. Those opportunities don't come along often, so Berkshire prefers to wait patiently.
Second, Berkshire's portfolio of wholly owned businesses, which includes railroads and insurance companies, is not immune to losses. For instance, an economic slowdown could hamper freight traffic and impair the earnings of Berkshire's railroads. Soaring inflation could make claims more expensive for its insurance businesses. Berkshire's cash provides a cushion to sustain its companies through tough times. Considering the growing chorus of downtrodden global economic forecasts, the company may be tempering its stock purchases to ensure its companies have the cash to endure a recession.
Those Buffett watchers would also point out that the legendary investor doesn't tend to make macroeconomic predictions. So, if Buffett is building a cushion for a recession, it is only as a safeguard for the company, not a global economic forecast.
What did Buffett buy?
During the quarter, Berkshire plunked down $391 million for 6.68 million shares of Occidental Petroleum (OXY -0.60%). The purchase of Occidental stock may not surprise some investors; Berkshire had already accumulated more than 180 million shares worth around $11 billion. What is a bit surprising is that Berkshire now owns more than 20% of Occidental's common shares, which means Berkshire may have to include Occidental on its financial statements. Some speculate that Buffett may eventually bid to buy the entire company. Helping the buyout case is Berkshire's $10 billion of preferred stock and warrants to buy another 84 million shares.
Interestingly, Berkshire repurchased over $1 billion of its own stock. No one knows the company and when to repurchase shares better than Buffett. He has told investors in the past that he'll only buy back shares if the price is significantly below his estimate of the company's intrinsic per-share value. Since the shares are roughly the same price as they were a year ago, one might expect share repurchases to match the $12.5 billion that Berkshire spent in the first half of 2021, but repurchases only amounted to $4.2 billion in the first half of 2022. Pulling back on stock buybacks may be another sign that Berkshire is preparing for the worst by reducing cash outflows.
Buffett's exact stock moves will be revealed in mid-August when Berkshire files its 13F disclosure statement with the Securities and Exchange Commission. At that point, investors will know what Berkshire is buying and selling, but I think the overall lack of action may speak louder than the individual moves themselves. Stay tuned.