When billionaire Warren Buffett speaks, Wall Street tends to pay close attention. In his nearly sixty years as CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), he oversees a cumulative return of nearly 5,600,000% on his company’s Class A shares (BRK.A). Few money managers have managed to consistently beat the benchmark S&P500 (SNPINDEX: ^GSPC) is very similar to Buffett.
While riding the Oracle of Omaha has been a profitable venture for decades, over the past two years we have witnessed a noticeable shift in Buffett’s investing habits. While he’s been a decisive stock seller of late, there’s one stock the Berkshire chief can’t stop adding to his 43-stock, $318 billion company’s portfolio.
Warren Buffett has quietly become a net seller of stocks
Let me preface this discussion by making one thing clear: Warren Buffett is a long-term optimist when it comes to the US economy and the stock market. He has repeatedly warned investors not to bet against America, and he wisely realizes that periods of economic growth tend to last longer than short-lived recessions.
Despite this rosy long-term outlook, the Oracle of Omaha is also an avid value investor who has historically been unwilling to push stocks higher when valuations aren’t attractive.
Between October 1, 2022 and June 30, 2024, a period of seven quarters, Buffett and his team oversaw nearly $132 billion in net stock sales. The majority of this selling activity can be traced to the dumping of over 500 million shares Apple over a three-quarter distance. However, Form 4 filings with the Securities and Exchange Commission also show more than $10 billion in value Bank of America Since mid-July, the stock has been on the chopping block.
This continued selling activity from Berkshire Hathaway’s brightest investing minds is almost certainly a response to the stock market being historically pricey.
On Monday, the S&P 500 is timeless Dow Jones Industrial Average closed at respective record highs. More telling, the S&P 500’s Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, has reached its highest level of the year.
The Shiller P/E is a valuation tool that takes into account the average inflation-adjusted earnings of the past ten years. This makes it an excellent apples-to-apples measure of value.
As of the closing bell on October 14, the Shiller price-to-earnings ratio of the S&P 500 was 37.70, more than double the average reading of 17.16 backtested to January 1871. This also represents the third highest reading during the closing bell of October 14. an ongoing bull market.
After the five previous instances, spanning a 153-year period, in which the Shiller price-to-earnings ratio exceeded 30, the broad-based S&P 500 and/or Dow Jones Industrial Average ultimately lost 20% to 89% of their value. Wall Street simply cannot sustain premium valuations for any length of time – and the Oracle of Omaha knows it.
The Oracle of Omaha is stacking up to become a historic cheap legal monopoly
But despite being a big stock seller for two years, the Oracle of Omaha has managed to unearth at least one value stock.
After 15 separate Form 4 filings detailing the selling activities at Bank of America since mid-July, investors were served a Form 4 filing after the closing bell on October 11 detailing the buying activities of satellite radio operators. Sirius XM Holdings (NASDAQ: SIRI). Berkshire’s brightest investment minds spent $86.7 million to buy an additional 3,564,059 shares from October 9 to 11, increasing their stake in the company to 32.1%.
This year has been undeniably challenging for Sirius XM, which is grappling with a two-quarter decline in satellite radio subscribers. It is depending on strong vehicle sales and the three-month promotional offer for its satellite radio services that comes with those sales to convert promotional listeners into self-paying subscribers. If car sales don’t impress, Sirius XM may struggle to convert promotional listeners into paying users.
But what Sirius XM does have are some clearly visible competitive advantages and a historically cheap valuation that the Oracle of Omaha can’t resist.
Sirius XM’s defining characteristic is that it is one of America’s few publicly traded legal monopolies. While the fact that the company is the only licensed satellite radio operator does not mean that the company has no competition, it does lead to significant pricing power. In other words, Sirius XM can raise its subscription prices to ensure it exceeds inflationary pressures.
In addition to being a legal monopoly, Sirius XM differs from traditional radio operators in several important ways.
For starters, online and terrestrial radio companies generate almost all of their revenue from advertising. Meanwhile, Sirius recessions. The same cannot be said for traditional radio companies.
Sirius XM also features a degree of cost predictability, something you wouldn’t see with terrestrial radio operators. While royalty expenses and talent acquisition costs will fluctuate from one quarter to the next, transmission and equipment costs are largely static regardless of how many subscribers the company adds. Ideally, this should lead to margin expansion in the long term.
I would be remiss if I didn’t also mention that Sirius XM has a generous capital return program. Excluding an existing $1.17 billion share repurchase authorization from the board of directors, the company is handing out a 3.9% yield that crushes the S&P 500.
The final piece of the puzzle that clearly compels Buffett to buy shares of this legal monopoly hand over fist is its valuation. Buffett’s purchases last week delivered Sirius XM shares at just seven times next year’s earnings, the cheapest since it became a publicly traded company 30 years ago.
Warren Buffett is a big fan of low-cost, proven companies with sustainable moats – and that’s exactly what he gets with Sirius XM.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has one disclosure policy.
Warren Buffett buys shares of this legal monopoly, Hand Over Fist, originally published by The Motley Fool
