There's a mystery afoot -- and Warren Buffett is at the center of it.
Berkshire Hathaway's regulatory filing to the U.S. Securities and Exchange Commission last month revealed that Buffett and his team bought only three stocks in the fourth quarter of 2023. However, for the second quarter in a row, Berkshire requested SEC approval to withhold the disclosure of one or more holdings.
Buffett seems to have bought a mystery stock in Q4. Here are three good candidates.
1. JPMorgan Chase
Whatever the mystery stock is, it's probably in the financial services sector. Why? In Berkshire's Q3 and Q4 quarterly regulatory filings, the company's reported cost basis for "banks, insurance and finance" equities increased. However, Berkshire didn't publicly reveal any purchases of financial stocks in either quarter.
JPMorgan Chase (JPM 0.06%) is exactly the kind of bank stock Buffett has liked in the past. In fact, he began building a sizable stake in the financial services giant in 2018 but exited the position in late 2020.
Buffett has been pals with JPMorgan Chase CEO Jamie Dimon for years. When JPMorgan was under fire in 2013, Buffett compared Dimon's leadership of the company to baseball great Babe Ruth. In 2018, Buffett and Dimon teamed up in an attempt to convince CEOs to stop providing quarterly earnings guidance.
JPMorgan Chase stock is relatively inexpensive with a forward price-to-earnings ratio of only 11.6x. The company is highly regarded in the industry. Also, Berkshire Hathaway investment manager Todd Combs sits on its board of directors. Perhaps all of these factors are enough to solve the mystery: Buffett just might have bought JPMorgan Chase shares.
2. Capital One Financial
Sometimes the best answer to a puzzle is to look back to the recent past. The last financial services stock that we can know for sure Buffett bought is... Capital One Financial (COF 0.16%).
Berkshire didn't initiate many new positions in 2023. However, in the first quarter, the conglomerate bought more than 9.9 million shares of Capital One Financial. It added over 2.5 million shares in Q2. Then the purchases stopped. Or did they?
Capital One is even cheaper than JPMorgan Chase or Buffett's top financial stock -- Bank of America. Its shares trade at only around 9.8 times forward earnings.
During the latter part of 2023 Q3 and early Q4, Capital One's share price was lower than in Q2, when Buffett was still scooping up shares. Maybe, just maybe, the legendary investor decided to make the financial services company his next "whale" and started to buy so aggressively that Berkshire wanted to keep its transactions secret.
3. Discover Financial Services
Now for more of a longshot. Buffett could have targeted Discover Financial Services (DFS 1.62%) for Berkshire's portfolio.
Discover trades at a more attractive valuation than JPMorgan Chase with a forward earnings multiple of around 10.8x. It also has a higher return on invested capital (ROIC) -- a metric that Buffett is known to like -- in recent years than JPMorgan.
There is a twist with this candidate, though. Capital One announced plans to acquire Discover in February 2024. If Berkshire was aware of any discussions between the two companies, it couldn't have purchased shares of Discover without violating insider trading regulations.
But Berkshire has initiated a significant stake in a company in the not-too-distant past shortly before a major acquisition was announced. In late 2021, one of the conglomerate's two investment managers bought shares of Activision Blizzard. Soon afterward, Microsoft revealed plans to acquire Activision Blizzard for $68.7 billion. Buffett denied having any knowledge about the transaction beforehand.
What isn't a mystery
Did Buffett buy JPMorgan Chase, Capital One Financial, or Discover Financial Services in late 2023? It's still a mystery. What isn't a mystery, though, is that the Oracle of Omaha will only invest in stocks that he believes are well-run and reasonably valued based on their earnings prospects. That's a smart and transparent strategy for any investor.
