When it comes to making money, few money managers can hold a candle to billionaire Warren Buffett. Since becoming CEO of Berkshire Hathaway (BRK.A 0.32%) (BRK.B 0.30%) in 1965, he's created almost $590 billion in value for his shareholders and delivered an aggregate return of better than 3,600,000% for his company's Class A shares (BRK.A). That's an average annual return of 20.1%, through Dec. 31, 2021, for those of you keeping score at home.
In other words, riding the Oracle of Omaha's coattails to big gains has been a proven investment strategy for decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Bear markets are usually an excuse for Warren Buffett to go shopping
The good news for investors is that following Buffett's every move is fairly easy. Investment funds and wealthy individuals with over $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission within 45 days following the end of a quarter.
A 13F provides an under-the-hood look at what the brightest and most successful minds on Wall Street bought, sold, and held during the recently ended quarter. Even though 13Fs have their flaws, such as being backward-looking by at least six weeks, they can help identify trends and stocks that are piquing the interests of successful money managers. Because Berkshire Hathaway has an investment portfolio topping $300 billion in market value, it's absolutely required to file a 13F each quarter.
As you might imagine, the Oracle of Omaha has been something of a busy bee as stock valuations have plunged. During the first half of 2022, Buffett deployed tens of billions of dollars to buy or add to more than a dozen stocks. Considering that Buffett takes a very long-term view when investing in stocks, it's not in the least bit surprising to see him aggressively put Berkshire Hathaway's cash to work during sizable downturns.
The one stock the Oracle of Omaha has reduced in each of the past two bear markets
Interestingly, though, bear markets have also been a time where Buffett and his investment team reduce their exposure to select companies or industries. This happened during the coronavirus crash of 2020, when Berkshire Hathaway reduced or completely sold more than a dozen stocks, and it happened again, albeit to a smaller degree, in the first half of 2022.
Among this selling activity over the past two bear markets is one constant: auto stock General Motors (GM -0.02%).
During the brief bear market in 2020, Berkshire Hathaway sold 319,000 shares of GM, which reduced its existing stake by less than 1%. Although Buffett's company added just over 2 million shares to its position in GM during the first quarter of 2022, it ultimately sold close to 9.17 million shares in the June-ended quarter. On a net basis, Berkshire Hathaway has reduced its stake in GM by 7,122,641 shares since 2022 began.
Why sell shares of General Motors? Although Buffett is known for packing his investment portfolio with cyclical companies and not being too concerned with when bear markets and recessions will occur, it's tough to ignore the multiple headwinds the auto industry is facing. Semiconductor chip shortages have caused automakers to reduce or halt production for select models. Additionally, parts shortages and COVID-19-related supply chain challenges domestically and in China have made it difficult to simply maintain output.
Historically high inflation is an issue for General Motors and its peers. A combination of higher input costs and workers having more wage-bargaining power means having to make a tough choice. Automakers can either eat some of these cost increases and hurt their margins, or raise prices and push some potential buyers out of a new car.
To add to this point, rapidly rising interest rates spell bad news for prospective buyers looking to finance their purchase. With the Federal Reserve focused on taming historically high inflation, the cost to borrow is only going up. When combined with higher input costs, it's a recipe for consumer sticker shock.
The GMC Hummer EV is one of 30 electric vehicles GM plans to launch by the end of 2025. Image source: General Motors.
Could Warren Buffett be (gasp!) wrong?
It's certainly feasible that a cyclical company like General Motors could see reduced demand for new vehicles if the U.S. and global economy continue to weaken. But Berkshire Hathaway reducing its stake in a clear value stock raises the question: "Could Warren Buffett be wrong?"
To be fair, all investors are fallible, and the Oracle of Omaha has had his fair share of poor investments and bad trades before. Though Berkshire is still holding close to 52.9 million shares of GM in its investment portfolio, I do believe reducing its stake will turn out to be a regrettable move.
For much of the past two decades, General Motors was looking for an organic spark -- and it finally has it. The electrification of consumer and enterprise fleets provides a multidecade organic growth opportunity. With most developed countries pledging to reduce their respective carbon footprints, encouraging electric vehicle (EV) sales at the consumer and enterprise level is a no-brainer.
For its part, General Motors plans to invest an aggregate of $35 billion through 2025 to develop and launch EVs, autonomous vehicles, and battery-focused plants. The expectation from CEO Mary Barra is that her company will launch 30 EVs globally by the end of 2025, as well as generate $50 billion in annual sales from EVs in North America by mid decade. Ultimately, Barra believes General Motors could produce 2 million EVs in North America and China by 2025.
The beauty of selling EVs is twofold. First, as noted, it's a long-running replacement cycle. This should provide steady and historically above-average sales growth for GM and its peers. Second, EVs have the potential to generate superior vehicle margins when compared to internal combustion-engine vehicles. As production processes are refined over time, EV margins could be surprisingly juicy for legacy producers like General Motors.
Don't overlook GM's existing presence in China, either. This is a company that's delivered approximately 2.9 million vehicles in the No. 1 auto market in the world in back-to-back years. Having an established brand in China's nascent EV market could allow General Motors to become a key player.
Even the most bearish of the 19 Wall Street analysts covering GM still expects it to produce nearly $4 in earnings per share in 2023 amid challenging conditions. This bottom-of-the-barrel forecast places General Motors at a forward price-to-earnings ratio of 8, which is still historically inexpensive given its longer-term growth prospects.
