Berkshire Hathaway (NYSE: BRK.A) (BRK.B +0.48%) has, for the most part, been selling stocks for much of the year, with its cash balance hitting record levels. CEO Warren Buffett doesn't appear to have been finding many bargains out there worth pursuing.
That's why Berkshire's latest move raised some eyebrows: adding Alphabet (GOOG +3.26%)(GOOGL +3.50%) to its portfolio. Buffett generally avoids tech stocks, which leads many analysts to conclude the purchase wasn't made by him. And this could be a sign of many more changes to come, especially since the billionaire investor is stepping down at the end of the year.
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Buffett regretted not investing in Alphabet earlier
According to Berkshire's 13F filing, the company owns approximately 17.8 million shares of Alphabet as of the end of September.
Alphabet is what I'd consider to be a prototypical Buffett stock. It has two highly popular assets in Google Search and YouTube, which have strong competitive advantages that the billionaire investor often seeks out when finding blue chip stocks to invest in. They also have what he refers to as a "share of mind," in that people often think of those brands and generally have good feelings about them.
In years past, Buffett admits to missing out on Google. And his partner, the late Charlie Munger, said that "we just sat there sucking our thumbs," admitting that they saw the success the business had become, but failed to pull the trigger.
The big reason Buffett may have passed on the tech giant in the past is because he isn't overly comfortable investing in tech stocks; it's not within what he would say is in his "circle of competence" -- something he suggests investors stay within, to ensure they aren't investing in businesses they aren't familiar with.
Could this move be a sign of greater changes ahead?
For Berkshire to now invest in Alphabet suggests to me that perhaps Greg Abel, Berkshire's incoming CEO, may be more willing to have the stock be among the company's top holdings. It could be a sign that, at the very least, there's going to be a greater appetite for tech stocks in Berkshire's portfolio in the near future, so Buffett didn't oppose this latest buy.
There are tech stocks in Berkshire's portfolio, but they are generally more modest positions. Amazon is a holding, but it accounts for just 0.7% of the entire portfolio. Alphabet, meanwhile, accounts for 1.7% right now. It's quickly become one of the larger holdings in the Berkshire portfolio, and I believe there could be more tech stocks to find their way there in the coming months.
While this doesn't mean Berkshire's new management is necessarily going in a completely different direction than Buffett, but with different competencies, the new CEO may simply be more comfortable holding more of a position in tech.
NYSE: BRK.B
Key Data Points
Why a transition to tech could make Berkshire's stock an even better buy
Berkshire's portfolio is full of recognizable consumer brands, which, unfortunately, may not make for great investments anymore. While Coca-Cola and Kraft Heinz are well-known businesses and are top Berkshire holdings, both have significantly underperformed the S&P 500 (^GSPC +0.98%) in the past five years; the former is up over 33%, while the latter has declined by 21%. By comparison, the broad index is up more than 83% during that time frame.
A transition away from these types of slower-growing businesses and into more tech stocks could be a move that ends up paying off for investors. I wouldn't be surprised to see more of these types of moves in the future for Berkshire, as a change in management could mean a different mix of stocks for the company.
While Buffett leaving the company may have investors worried about its future, I'm optimistic it could help reenergize its portfolio and lead to better returns in the long run.
