A half-century ago, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) held its first annual meeting in the employee cafeteria of National Indemnity Company, which is one of Berkshire's subsidiaries. It drew a few dozen people. Today, Berkshire's annual shareholder meetings in Omaha, Nebraska, can tip the scales at more than 40,000 shareholders and investors.
The lure of these meetings is the chance to listen to CEO Warren Buffett discuss everything from his views on the economy to specific stocks or the stock market in general. Since taking over as CEO in 1965, the Oracle of Omaha has led his company's Class A shares (BRK.A) to an aggregate gain of 4,210,902%, as of the closing bell on July 19, 2023. On an annualized basis, through the end of 2022, Berkshire Hathaway had doubled up the total return, including dividends, of the benchmark S&P 500.
The point being that riding Warren Buffett's coattails has been a successful moneymaking strategy for decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett has a nearly $700 million hidden investment portfolio
Mirroring Warren Buffett's buying and selling activity can be done by tracking Berkshire Hathaway's quarterly Form 13F filings with the Securities and Exchange Commission. A 13F provides a snapshot of what top-tier money managers purchased and sold in the latest quarter.
But what investors might be surprised to learn is that Berkshire's 13Fs fails to tell the complete story. Back in 1998, Buffett's company acquired reinsurer General Re, which also owned specialty investment firm New England Asset Management (NEAM). When Berkshire closed on this $22 billion deal in December 1998, it became NEAM's owner.
To be fair, Warren Buffett doesn't oversee NEAM's investment portfolio in the same way he advises Berkshire Hathaway's $384 billion investment portfolio. Nevertheless, what New England Asset Management buys and holds is, ultimately, owned by Berkshire Hathaway. Effectively, New England Asset Management is Warren Buffett's secret portfolio.
During the March-ended quarter, NEAM reduced its invested assets from north of $5 billion to less than $700 million. Previously core holdings, such as Apple, Bank of America, Chevron, and HP, were reduced by 98% to 99%, if not eliminated completely, as was the case with HP.
Yet amid this aggressive selling, the money managers overseeing Warren Buffett's secret portfolio did some selective buying. What follows are three magnificent stocks that were added hand over fist in the first quarter.
Verizon Communications
The first brand-name stock Buffett's secret portfolio has been piling into is telecom company Verizon Communications (VZ 1.17%). New England Asset Management purchased 56,570 shares of Verizon during the first quarter, which upped its stake in the company to north of 200,000 shares.
Last week, shares of Verizon screamed to a 13-year low following a report from The Wall Street Journal that legacy telecom companies could be financially liable for potential contamination and health issues caused by lead-sheathed cables. This newfound concern, coupled with Verizon's large debt load, has weighed on the company's stock.
However, this short-term pain may represent an opportunity. For one, the services telecom companies provide are borderline basic necessities. No matter how challenging the economic environment, most consumers aren't going to give up their smartphones or access to the internet. Low churn rates suggest telecom behemoths like Verizon can be counted on for highly predictable operating cash flow.
Verizon is also enjoying something of a renaissance with its wireless and broadband growth. In terms of the former, the upgrade of wireless networks to support 5G download speeds should encourage a device-replacement cycle that lasts for years. Verizon will ultimately benefit from an increase in consumer data consumption. Data is the dangling carrot that generates the juiciest margins for Verizon's wireless division.
Meanwhile, Verizon spent nearly $53 billion, including incentive payments and clearing costs, purchasing mid-band spectrum in March 2021, with the purpose to bring 5G broadband to residential homes and businesses across the country. In the March-ended quarter, Verizon logged 437,000 net broadband additions, which marked its best quarter for net broadband adds in more than a decade.
Verizon looks like a case of a broken stock with a solid operating model.
CVS Health
A second magnificent stock that's being added hand over fist to Warren Buffett's secret portfolio is pharmacy chain CVS Health (CVS -0.22%). New England Asset Management scooped up 47,700 shares of CVS in the first quarter, which increased its stake by 114% from where things stood at the end of 2022.
Shares of the company have tumbled roughly 30% since last August, with a combination of recessionary fears and litigation at fault. CVS is one of a handful of companies that was named in state-level opioid lawsuits. While these have been tangible headwinds -- CVS agreed late last year to a national settlement that'll see it pay $5 billion over the next 10 years -- neither alters the company's long-term growth trajectory.
The top reason to buy into the CVS Health growth story is its vertical expansion into healthcare services. It began in 2018, when CVS acquired health insurer Aetna for a whopping $69 billion. Moving into the health insurance arena offered a path to higher organic growth, as well as incented Aetna's members to stay within the CVS umbrella of services.
CVS Health has since continued its vertical expansion. This year alone, CVS has closed the acquisitions of Signify Health to expand its in-home service offerings, and Oak Street Health, which offers valued-based primary care in close to two dozen states. Though growth by acquisition requires patience, CVS Health's revenue diversification is really starting to pay off.
Furthermore, don't discount the company's traditional pharmacy operations. Since we don't have the ability to control when we become ill or what ailment(s) we develop, demand for prescription drugs is going to be relatively constant in any economic environment. In other words, CVS Health is going to generate predictable cash flow, just like Verizon.
At a little north of 8 times forward-year earnings, CVS Health looks like a phenomenal value for long-term investors.
Image source: Getty Images.
Alphabet
The third magnificent stock that's being added hand over fist to Warren Buffett's secret portfolio is none other than FAANG stock Alphabet (GOOGL 10.22%) (GOOG 9.96%), the parent company of search engine Google and streaming platform YouTube. After opening a 17,100-share stake in Alphabet's Class A shares (GOOGL) in the December-ended quarter, New England Asset Management bought another 13,300 shares in the first quarter.
The biggest hurdle Alphabet has encountered is advertising weakness. With a number of recessionary indicators and metrics suggesting that economic weakness is on the horizon, advertisers have been quick to pare back their budgets over the past year. Alphabet generates the lion's share of its revenue from advertising.
But advertising is a two-sided coin. Though downturns are an inevitable part of the economic cycle, periods of expansion last substantially longer than recessions. For ad-driven businesses like Alphabet, it means possessing strong ad pricing power more often than not.
For the moment, Google remains Alphabet's cash cow. According to data from GlobalStats, Google accounts for nearly 93% of worldwide internet search share. Operating as a practical monopoly makes it a logical go-to for businesses wanting to reach a broad or targeted audience.
But it's the company's ancillary operating segments that are expected to propel its share price higher. YouTube is the second most-visited social site on the planet, while Google Cloud was responsible for 9% of global cloud infrastructure service spending in the first quarter, per Canalys. Google Cloud is a particularly interesting segment given that it generates substantially higher margins than advertising, and it produced its first-ever operating profit in the first quarter.
Despite bouncing back strongly from its 2022 bear market low, Alphabet still looks historically cheap, relative to its cash flow-generating potential.
