Warren Buffett hasn’t seen much to like in the stock market lately.
As shares have soared higher and higher over the past 18 months, it has become increasingly difficult to find a great company trading at a fair price. The challenge is even tougher for Buffett, who manages a portfolio of $377 billion in stocks and $189 billion in cash. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
The current environment is reflected in the portfolio management decisions Buffett makes. He has sold more shares than he bought over the past six quarters. But there’s one stock that caught his attention in the third quarter of last year, and he’s been racking up shares for the past three quarters.
By the end of 2023, he had bought about $5 billion worth of it. The only problem is that we couldn’t know exactly which stocks Buffett found so attractive, thanks to a special disclosure exemption from the SEC.
The time has finally come: Berkshire’s latest 13-F filing reveals all of the conglomerate’s stock holdings as of the end of the first quarter. Here are the mystery stocks that Buffett bought.
A stock that fits right into Buffett’s wheelhouse
The stocks on Buffett’s buy list in each of the past three quarters have been commercial property and casualty insurance companies Chubb (NYSE: CB).
Buffett has acquired nearly 26 million shares of the company over the past three quarters, a stake now worth about $6.9 billion. That’s good enough to make it a top-10 position in Berkshire’s portfolio.
Chubb fits perfectly into Buffett’s circle of competence. The Oracle of Omaha has been investing in insurance since the 1960s. Shortly after taking control of Berkshire Hathaway, a purely textile company, in 1965, Buffett added an insurance business to the conglomerate. Insurance is now the core of Berkshire Hathaway’s business and allows Buffett to invest valuable premiums.
With more than 60 years of experience in the insurance industry, it’s safe to say that Buffett knows when an insurance stock is attractive. His in-depth knowledge of the sector gives him an edge in identifying undervalued insurers. Chubb exhibits several attractive qualities as an insurer, but its stock price may not have fully reflected the quality of the company.
Many insurance companies did well in 2023 thanks to higher prices and interest rates. Chubb was no exception. Full year net earnings per share rose 75.9% thanks to a 13.5% increase in net premiums and booked and improved underwriting margins. The strong performance continued in the first quarter, with a 14.1% increase in net premiums written, likely due to higher prices.
Chubb’s investments are also doing well. The company has many long-term fixed income assets, such as mortgage-backed securities and corporate bonds, in its investment portfolio. That resulted in poor relative returns when the Federal Reserve raised rates, but is now producing strong investment income growth every quarter. Investment returns increased by 25.7% in the first quarter.
Chubb’s core activities look very strong and the investment picture is developing well. It’s no surprise that Buffett was interested in the stock.
Should investors follow Buffett’s lead?
Now that Berkshire Hathaway has revealed that Chubb is the stock it has been buying for the past three quarters, Buffett may be done buying more shares, at least for now. The stock has risen from about $200 per share when Buffett first bought it in the third quarter of last year to a new all-time high of $270 after Berkshire’s announcement.
Still, the stock is quite attractive. The stock trades for a price-to-earnings ratio of just 11.6x, putting it firmly in the value camp that Buffett favors. The price-to-book value of 1.7x is higher than the historical average, but also a fair price to pay given improving capex and strong underwriting activity.
Chubb remains a great investment for Buffett, even at this price. It ticks a lot of boxes. It has the potential for Berkshire to continue increasing its investments as it currently owns approximately 6.4% of the shares outstanding. It is a leader in its industry with great management. And it has lower downside risk than the average company, thanks to the stock’s current valuation and management’s handling of its balance sheet.
Investors looking for a solid financial sector value stock to add to their portfolio may want to take a closer look at Chubb.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Here are the stocks Warren Buffett has spent the last nine months secretly amassing a $6.9 billion stake. originally published by The Motley Fool
