Today, Nov. 14, 2022, should represent a big day for investors who closely monitor Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) CEO Warren Buffett's trading activity. That's because it's the 45th calendar day following the end of the third quarter, which marks the last day to file Form 13F with the Securities and Exchange Commission (SEC).
In simple terms, a 13F is a snapshot of what the smartest money managers were holding when the most recent quarter came to a close. Being able to compare this overview to the June 30, 2022, snapshot allows new and tenured investors to see what successful money managers bought and sold during the third quarter.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Because the Oracle of Omaha has overseen a greater than 3,600,000% return in his company's Class A shares since becoming CEO in 1965, Wall Street and everyday investors are known to ride his coattails into and out of investments.
But what you might not realize is you don't have to wait till Berkshire Hathaway files its 13F with the SEC to know what he's been buying. The company's third-quarter operating results, as well as other SEC filings, spilled the beans that Warren Buffett bought two stocks hand over fist during the third quarter.
Occidental Petroleum
The first stock the Oracle of Omaha and his investment team couldn't stop buying during the third quarter is integrated oil and gas stock Occidental Petroleum (OXY 0.58%). Because Berkshire Hathaway has a greater than 10% stake in Occidental, it's required to file Form 4 with the SEC anytime it adjusts its position. These Form 4 filings show that Berkshire's stake in Occidental grew from just shy of 158.6 million shares at the end of June to almost 194.4 million shares, as of Sept. 28, 2022.
Warren Buffett's fascination with energy stocks in 2022 is both incredibly intriguing and head-scratching at the same time.
On one hand, it makes perfect sense for Buffett to be intrigued by the prospects of energy stocks. During the pandemic, global energy majors significantly reduced their capital investments, which makes it unlikely that oil, gas, and natural gas liquid supply can be ramped in a big way anytime soon. To add, Russia's invasion of Ukraine has threatened the supply of certain energy commodities to select European countries. In other words, supply constraints make it likely that crude oil and natural gas prices will remain well above average.
Additionally, Buffett and his team have put their money to work in two "integrated" oil and gas companies: Occidental and Chevron. Integrated energy companies generate their juiciest operating margins from drilling. However, they also operate midstream (e.g., transmission pipelines) and/or downstream assets (e.g., chemical plants and refineries). The benefit of an integrated model is that midstream and downstream assets act as a cash-flow hedge in the event that crude or natural gas spot prices weaken.
Yet the head-scratching aspect of Warren Buffett's Occidental Petroleum buy is that it has one of the uglier balance sheets among large oil stocks. Even though higher energy commodity prices have helped the company substantially reduce its net debt -- the company recently announced that it's repaid $9.6 billion of debt through Nov. 7, 2022, on a year-to-date basis -- Occidental still had $20.5 billion in net debt when the third quarter came to a close. It's odd to see Buffett so attached to a company with a less-than-stellar balance sheet.
However, with Berkshire Hathaway receiving regulatory approval in August from the Federal Energy Regulatory Commission to buy up to a 50% stake in Occidental Petroleum, there's a very real possibility that Buffett is nowhere close to being done adding to his company's already large position.
Image source: Getty Images.
Berkshire Hathaway
The other stock Warren Buffett bought hand over fist in the third quarter isn't going to show up on Berkshire Hathaway's 13F, which should be out a couple of hours after the stock market closes on Nov. 14. Instead, you'd have to give Berkshire Hathaway's third-quarter earnings report a read to see where the Oracle of Omaha and his right-hand man Charlie Munger put more than $1 billion to work last quarter.
On the very last page of the report, prior to hitting all of the certifications and signatures, Berkshire Hathaway details its share repurchase activity for the third quarter. Although Buffett and Munger chose not to buy back any Class B shares (BRK.B), approximately $1.04 billion of the company's war chest was deployed to buy back 2,416 Class A shares.
Prior to mid-July 2018, Berkshire Hathaway's dynamic duo was only able to repurchase their company's stock if shares fell to, or below, 120% of book value (i.e., more than 20% above book value per share). For more than a half-decade leading up to mid-July 2018, Buffett and Munger weren't able to repurchase a single share of their company's stock.
But a little over four years ago, Berkshire Hathaway's board of directors gave the company's investment savants more leeway by changing the buyback criteria. As long as Berkshire has at least $30 billion in cash and U.S. Treasuries on its balance sheet and the company's "dynamic duo" believe their stock is trading below intrinsic value, buybacks can occur without a limit. In just over four years, Warren Buffett and Charlie Munger have overseen the combined repurchase of $63.1 billion of their company's stock.
If you're wondering why the Oracle of Omaha has so aggressively emphasized buybacks, I'd point to three reasons. First, it slowly but steadily increases the ownership of existing shareholders of Berkshire Hathaway stock. Retiring shares via buybacks makes buy-and-hold investors larger stakeholders over time.
Secondly, share buybacks have a tendency to increase earnings per share (EPS) for companies with steady or growing income. Since there are fewer shares outstanding to divided net income into, higher EPS can make a company's stock more attractive to the investment community.
And third, I'd argue that Warren Buffett is willing to bet on himself and the culture he's created at Berkshire Hathaway. Since the majority of Berkshire's investment portfolio and roughly five dozen owned businesses are cyclical, Buffett has positioned his company to take advantage of long-winded economic expansions.
