The Labor Day weekend appears to have enabled investors to forget China's woes (at least temporarily), and U.S. stocks are rallying tidily on Tuesday. The Dow Jones Industrial Average (^DJI 0.16%) and the benchmark S&P 500 (^GSPC 0.03%) are up 1.74% and 1.59%, respectively, at 1:15 p.m. EDT.
At the end of last month, I highlighted in this column the large ownership stake that Berkshire Hathaway has amassed in Phillips 66, the country's largest independent refiner. Given the size of the position -- more than 10% of shares outstanding worth $4.5 billion as of Aug. 28 -- it almost certainly reflects one of Buffett's investments, rather than that of one of the two investment managers who work for him.
What price did the Oracle of Omaha pay for the 50.5 million shares he's scooped up since the start of the second quarter? That's a number someone who is considering buying the stock, or who already owns it, might be curious to know.
With travel depriving me of access to Bloomberg's <VWAP> function -- which provides the volume-weighted average price (VWAP) of the stock over a given period and is equivalent to the weighted average price of all buying activity over a specific time period -- I came up with a different approach. Instead of an average price for all activity, I calculated the average of each day's low for the period April 1 through Aug. 28. The result: $78.88. You can therefore consider that figure a floor for the average price Buffett paid on those 50.5 million shares (which represent 87% of his position at Aug. 28).
Phillips 66 shares were trading at $78.55 at 12:00 p.m. EDT, so it's possible right now to buy the shares below Buffett's cost basis for this latest buying spree. I'm not suggesting this is enough reason to go out and buy the shares: Anyone who buys individual stocks is well advised to do their own due diligence before making any investment.
Nevertheless, the observation suggests that the odds that Phillips 66 shares currently represent excellent value are high. Indeed, though Buffett isn't infallible, his "hit" ratio is very high.
Interestingly, a 2008 paper analyzing the returns of Berkshire's equity portfolio from 1976 though 2006 concluded (my emphasis):
The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index.
On Aug. 31, the first trading day after Berkshire's new purchases of Phillips 66 shares were made public, the stock rose 2.4% to close at $79.07 (the S&P 500 Energy index rose 1.1% that day). I suspect time will show that was also a significant under-reaction.