Greg Abel took over as CEO of Berkshire Hathaway (BRKA +0.94%) (BRKB +0.86%) at the start of the year and faced a monumental task. Warren Buffett, who managed the company for over 60 years, left him with a pile of cash totaling $369 billion. Abel has had to search for great investment opportunities in a market where valuations are stretched and where Buffett himself could hardly find much to buy in the last few years.
Abel has taken that cash and made some substantial investments. He oversaw the purchases of OxyChem and Taylor Morrison. He put billions into Japanese insurance company Tokio Marine and added to positions in the Japanese trading houses. He also added a significant amount to Berkshire's position in Alphabet (GOOG -0.83%) (GOOGL -1.19%), which Buffett said he initiated in the third quarter last year.
While Abel negotiated a $10 billion private placement for the stock in June, he may have spent even more on another stock last quarter.
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Abel's big investment
Abel's decision to add billions of dollars in capital to Berkshire's position in Alphabet has attracted a lot of attention, and with good reason. Alphabet seems different than Berkshire Hathaway's usual investments. It's a leading tech company, and it's become one of the faces of the artificial intelligence boom. Buffett was notably wary of artificial intelligence in the past, so it came as a bit of a surprise when he said he initiated the position for Berkshire.
Abel has taken the idea and run with it. He invested an estimated $13 billion into the stock in the first quarter and at least $10 billion in the second quarter.
Buffett explained exactly what attracted him and Abel to Alphabet recently: seeing tremendous returns on its invested capital with its AI data center build-out. Alphabet has long been a cash-generating machine, with its high-margin advertising funding its cloud computing business and its "other bets." Now, it has an opportunity to deploy a ton of cash with very high levels of confidence in its potential return on capital. That's a business that's very attractive to Buffett, and it very much fits within Berkshire's investing ethos.
NASDAQ: GOOG
Key Data Points
While many investors have balked at Alphabet's massive spending, which sent its free cash flow into negative territory last quarter, the company is quickly monetizing that spending. It already has $514 billion in contracted revenue, giving it the confidence to build out more data centers. That's helped propel its cloud revenue growth, which accelerated to 82% last quarter and could climb even higher. The cash returns may take a couple of years to show up, but when they do, they could be massive.
So, Abel took the opportunity to buy Alphabet and buy a lot at a good valuation during the first half of the year. But he may have seen a stock trading at an even more attractive valuation last quarter, where he could deploy huge amounts of cash.
Abel may have spent $11 billion on one of Buffett's favorite stocks
While Abel was accumulating shares of Alphabet, he was also quietly buying up shares of another trillion-dollar company: Berkshire Hathaway itself. After reinitiating the company's share repurchase program in March, Abel disappointed investors with a meager $235 million in total buybacks. He appears to have stepped up the buying quite a bit in Q2.
Based on Buffett's Form 4 filings with the Securities and Exchange Commission (SEC) in July, Abel significantly reduced Berkshire's share count in the three months between mid-April and mid-July. He spent between $5 billion and $11 billion in total on repurchases, according to an analysis by Barron's.
Even at the low end of that estimate, it would mark the highest amount returned to shareholders in a quarter since 2021. At the high end, it would be the largest amount ever spent on share repurchases in Berkshire's history.
NYSE: BRKB
Key Data Points
That's a sign Abel sees Berkshire shares as a very good investment right now. The share repurchase authorization requires that the stock trade below its intrinsic value, conservatively determined by the CEO (Abel) and the Chairman of the Board (Buffett).
Indeed, Berkshire's stock price has churned sideways this year while other insurance stocks and railroad stocks have moved higher. That's despite the notable appreciation in Berkshire's marketable equity portfolio. So, there appears to be some disconnect between the market and Berkshire stock. What's more, the stock trades for around 1.5 times its book value from the end of Q1. That's on the low end of its range since 2024.
Investors will find out for certain how much Abel spent on share repurchases (and Alphabet stock) last quarter when Berkshire releases its Q2 results on Saturday. Investors should take Abel's capital deployment as bullish signs for both stocks.
