In 1965, Warren Buffett became CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%). Over the past 58 years, all he's done is double up the annualized total return of the S&P 500 (19.8% vs. 9.9%, as of Dec. 31, 2022) and oversee an aggregate return in his company's Class A shares (BRK.A) of greater than 4,400,000%, as of the closing bell on Aug. 9, 2023. It's figures like these that encourage close to 40,000 people annually to trek to Omaha, Nebraska, to listen to the Oracle of Omaha offer his sage advice.
Thankfully, Warren Buffett and Berkshire Hathaway are open books. Buffett has been more than willing to share what he looks for in investments. Likewise, investors have access to filings with the Securities and Exchange Commission (SEC) that detail every nook and cranny or what makes Berkshire Hathaway tick.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
One such filing, Form 13F, is particularly helpful for investors. A 13F is a required quarterly filing for money managers with at least $100 million in assets under management. It provides a snapshot of what's been purchased, sold, and held in the most recent quarter. For those investors wanting to mirror the Oracle of Omaha's trades, a 13F is invaluable.
Although Berkshire's 13F is due out after the closing bell today (Monday, Aug. 14), investors don't have to wait until its release to know some of the moves Warren Buffett made during the second quarter. Based on an assortment of SEC filings, it's readily apparent that Buffett is buying two stocks hand over fist, while surprisingly paring down another top holding.
Stock No. 1 Warren Buffett can't stop buying: Berkshire Hathaway
For all the hoopla made about Berkshire Hathaway's largest holding, Apple, which accounts for 45% of invested assets, there isn't a stock Buffett and his team have plowed more money into over the past five years than their own company, Berkshire Hathaway.
Toward the end of every Berkshire Hathaway quarterly report, the company details its share repurchase activity. In the June-ended quarter, Warren Buffett and famed sidekick Charlie Munger oversaw the repurchase of 1,042 Class A shares and 2,354,444 Class B shares (BRK.B), equating to a little over $1.3 billion in market value. This marked the 20th consecutive quarter Berkshire Hathaway has bought back its own stock. More impressively, Buffett and Munger have spent an aggregate of more than $71 billion on buybacks since July 2018.
If you're wondering why Buffett has put over $71 billion of his company's cash to work buying back his own stock, there are three good reasons.
To start with, it's Warren Buffett's way of rewarding his company's long-term shareholders. Although Berkshire doesn't pay a dividend, retiring shares via buybacks and reducing the outstanding share count makes existing investors larger stakeholders in the company.
The second catalyst behind Berkshire Hathaway's aggressive share repurchase activity is that it has a positive impact on the company's earnings per share (EPS). Businesses like Berkshire that have steady or growing net income often enjoy an EPS lift as the outstanding share count declines over time. In other words, it's making Berkshire Hathaway's stock more attractive to fundamentally focused investors.
Lastly, the more than $71 billion in aggregate buybacks undertaken since July 2018 may symbolize Warren Buffett's and Charlie Munger's faith in the company they've built. Berkshire Hathaway has a solid foundation of brand-name, cyclical businesses that it owns and invest in, which shouldn't have any trouble growing their sales and profits over the long run.
Stock No. 2 Warren Buffett can't stop buying: Occidental Petroleum
The second stock that Warren Buffett and his investing lieutenants, Ted Weschler and Todd Combs, have been buying hand over fist is energy company Occidental Petroleum (OXY -0.15%).
Because Berkshire Hathaway owns a double-digit percentage stake in Occidental, it's required to file Form 4 with the SEC any time it purchases or disposes of shares. These Form 4 filings mean investors don't have to wait till the next round of 13Fs to know what the Oracle of Omaha and his team have been up to.
Since the start of 2022, Buffett and his investing lieutenants have grown Berkshire's common stock position in Occidental Petroleum from 0 shares to north of 224.1 million shares. This includes multiple purchases during the second quarter of 2023.
The likeliest reason Buffett and Co. have more than $14 billion riding on Occidental common stock is the belief that the spot price for West Texas Intermediate (WTI) crude will remain elevated. This thesis is supported by more than three years of capital underinvestment from global energy majors, resulting from pandemic uncertainty. Additionally, Russia's ongoing war with Ukraine clouds Europe's energy supply needs. As long as the global supply of oil remains tight, there's good reason to expect upward pressure on the price of WTI.
While most oil stocks benefit from a higher spot price for WTI or Brent crude, Occidental Petroleum enjoys an outsized advantage. Though it's an integrated operator with downstream chemical plants, Occidental generates a majority of its revenue from drilling. Put simply, its operating cash flow is far more levered to swings in the spot price of WTI than its peers.
To boot, Occidental Petroleum increased its quarterly payout by 38% earlier this year, as well as introduced a $3 billion share repurchase program. Warren Buffett loves businesses with healthy capital-return programs.
Image source: Getty Images.
The surprising stock Warren Buffett is selling: Chevron
However, you might be surprised to learn that Buffett and his team have been net-sellers of equities since October 2022. In the nine-month stretch ended in June, Berkshire Hathaway sold $33.03 billion more in equities than it purchased. One stock that accounts for a meaningful portion of this $33 billion in net sales is integrated oil giant Chevron (CVX 0.37%).
Based on Berkshire Hathaway's 13F from mid-May, the company owned 132,407,595 shares of Chevron. As of June 30 (i.e., the ending date of Berkshire's second quarter), these shares should have carried a market value of around $20.8 billion. But in Berkshire Hathaway's second-quarter report, Chevron only accounted for $19.4 billion in aggregate fair value. It would appear that Buffett and team further reduced Berkshire's stake in Chevron by well over $1 billion during the second quarter.
This ongoing pare-down in Chevron is certainly a surprise and something of a head-scratcher, especially when you consider that Berkshire Hathaway has progressively increased its stake in Occidental Petroleum since the start of 2022.
Comparatively, Chevron is considerably more diversified than Occidental. While both are integrated operators, Chevron's transmission pipelines, chemical plants, and refineries, help it hedge potential declines in WTI and Brent pricing far better than Occidental Petroleum.
Likewise, Chevron's balance sheet is considerably more promising than Occidental. A surge in operating cash flow over the past two years helped Chevron substantially reduce its net debt. Though Occidental has lowered its net debt by more than $15 billion in two years, it's still digging out of a net-debt hole that stood at almost $19.7 billion, as of June 30.
Perhaps the best explanation as to why the Oracle of Omaha and his team continue to choose Occidental over Chevron is the warrants Berkshire holds for Occidental.
When Occidental acquired Anadarko in 2019, Buffett's company supplied the former with $10 billion to facilitate the deal. In exchange, Berkshire Hathaway received $10 billion in Occidental preferred stock yielding 8% annually, as well as warrants for 83,858,848 Occidental shares, which can be exercised at $59.624 per share. It's in Buffett's best interest that Occidental's share price remain well above this exercise price.
