Berkshire Hathaway (BRK.A +0.55%)(BRK.B +0.78%) CEO Warren Buffett has a knack for drawing investors' attention. That's because the Oracle of Omaha, as he's now affably known by the investing community, has doubled-up the annualized total return, including dividends paid, of the benchmark S&P 500 since taking the reins at Berkshire in 1965. When you continually run circles around Wall Street, there's a good chance you're going to get noticed.
Following in Warren Buffett's footsteps has been a profitable strategy for well over a half-century, and it's relatively easy to do.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett's company was a selective stock buyer during the second quarter
No later than 45 days following the end of a quarter, money managers with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. This fancy-sounding filing provides a detailed look at what asset managers were holding at the end of the most recent quarter. In other words, it allows everyday and professional investors to see what the brightest minds on Wall Street bought and sold in the latest quarter.
Last week, Berkshire Hathaway's 13F filing detailed some very calculated buying. Although the Oracle of Omaha and his investing lieutenants, Ted Weschler and Todd Combs, have been net-sellers of equities since the start of October 2022, Berkshire's 13F shows that five stocks were purchased in the second quarter. These five stocks are:
- Occidental Petroleum (OXY +0.26%): 12,422,073 shares purchased
- D.R. Horton (DHI 0.36%): 5,969,714 shares purchased
- Capital One Financial (COF +1.42%): 2,549,030 shares purchased
- Lennar (LEN 0.85%)(LEN.B 0.57%): 152,572 Class B shares (LEN.B) purchased
- NVR (NVR 0.33%): 11,112 shares purchased
Collectively, that's three brand-new positions in homebuilders -- D.R. Horton, Lennar, and NVR -- totaling more than $810 million in market value, as of the end of June, as well as additions to Berkshire's existing stakes in Occidental Petroleum and Capital One.
NYSE: OXY
Key Data Points
The continued buys in Occidental are particularly interesting given that Buffett and his team have been paring back their position in Chevron. Both are integrated oil and gas companies that would seemingly benefit from tighter oil supply caused by Russia's war with Ukraine and years of underinvestment during the COVID-19 pandemic.
However, when compared to Chevron, Occidental Petroleum generates a disproportionate percentage of its revenue from drilling. If the spot price of crude oil receives a substantial lift from tighter global supply, Occidental may be able to deliver outsized cash flow.
The Capital One Financial add looks to be a reflection of strong consumer spending and hawkish monetary policy actions taken by the Federal Reserve. The steepest rate-hiking cycle in decades should allow lenders like Capital One to collect a boatload of extra net-interest income with the federal funds rate rising 525 basis points since March 2022. Even if credit delinquencies rise, the benefit of higher interest rates may outweigh any negatives associated with charge-offs.
Meanwhile, Warren Buffett's calculated bet on homebuilders looks to be another example of understanding supply and demand. With 30-year fixed-rate mortgages skyrocketing from record lows of less than 3% to 21-year highs north of 7%, existing homeowners aren't incented to move, which has effectively frozen the market. New homes from industry leaders like D.R. Horton, Lennar, and NVR, are proving to be the best choice for prospective homebuyers, which is why all three homebuilders have seen their earnings forecasts climb.
Image source: Getty Images.
Forget homebuilders, Occidental Petroleum, and Capital One -- this was Buffett's biggest Q2 buy
While it's encouraging to see the Oracle of Omaha undertaking some selective buying, Berkshire Hathaway's 13F isn't telling investors the full story. While it would appear that D.R. Horton was the biggest single purchase during the second quarter, a closer look at Berkshire's quarterly operating results shows otherwise.
While most investors peruse Berkshire Hathaway's quarterly results for the company's headline revenue and profit figures, the tail-end of the company's report is where the juiciest information is contained. The page immediately preceding Berkshire Hathaway's certification signatures details the company's share repurchase activity. As has become customary of late, no stock was a more popular buy for Warren Buffett in the latest quarter than his own company, Berkshire Hathaway.
Whereas Buffett's company purchased somewhere in the neighborhood of $700 million worth of D.R. Horton in the second quarter, the 1,042 Class A shares (BRK.A) and 2,354,444 Class B shares (BRK.B) bought back equated to $1,302,648,276.48.
Buying back their own company's stock is nothing new for Warren Buffett or executive vice chairman Charlie Munger. Berkshire's dynamic duo have overseen 20 consecutive quarters of share buybacks totaling more than $71 billion. To put this into context, Buffett and Munger could have purchased any of 390 S&P 500 companies over the past five years, but chose to pile it all into share buybacks instead.
NYSE: BRK.B
Key Data Points
As long as Berkshire has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Berkshire's dynamic duo believes their company's shares are intrinsically undervalued, buybacks can continue with no ceiling.
The "Why?" behind Warren Buffett's aggressive buyback policy boils down to three factors. First, he wants to reward his company's patient shareholders by steadily growing their ownership stakes. As Berkshire's outstanding share count shrinks, each remaining share owned becomes that much scarcer.
Secondly, it's a way to make Berkshire Hathaway stock more fundamentally attractive. Companies like Berkshire that have steadily growing operating income (note, I'm excluding volatile unrealized investment gains and losses) with declining outstanding share counts should see their earnings per share rise over time.
The third catalyst behind this aggressive repurchase program likely has to with Buffett and Munger reinforcing Berkshire Hathaway's long-term growth strategy. Over many decades, Berkshire's duo has packed their company's investment portfolio and owned assets with cyclical businesses. These are generally profitable, time-tested businesses that benefit from an expanding American economy over the long run.
While Buffett may have a new interest in homebuilders, Berkshire Hathaway is still his unquestioned favorite stock to buy.
