For much of the last 60 years, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has easily beaten Wall Street’s major stock indexes.
The “Oracle of Omaha,” as he is affectionately known by the investment community, has overseen an average annual return on his firm’s Class A shares (BRK.A) that is nearly double the annual total return of the benchmark S&P 500including dividends, since the mid-1960s. More recently, he watched Berkshire reach a $1 trillion valuation, a milestone only eight U.S.-listed companies have ever achieved.
Even though Warren Buffett is fallible, Berkshire suffered a significant loss on its now-sold stake in media stocks Paramount Worldwide earlier this year – his remarkable outperformance against the broad market indices has earned him a large following among both new and experienced investors.
But despite Buffett being a big supporter of the U.S. economy and long-term investing, his buying behavior has been exceptional selective.
The Oracle of Omaha is a big net seller of shares for seven consecutive quarters
Investors typically wait on the edge of their seats for Berkshire Hathaway to file Form 13F each quarter. The form provides a detailed look at which stocks Buffett and his most trusted investment advisors, Todd Combs and Ted Weschler, have been buying and selling.
However, Berkshire’s cash flow statements, included in its quarterly results, provide the clearest picture of how he and his team think about stocks.
From the fourth quarter of 2022 (October 1, 2022) through June 30, 2024 (a seven-quarter period), Berkshire’s smartest investment minds have been net sellers of shares:
In total, Buffett has overseen the sale of nearly $132 billion more in stocks than he and his team have bought since October 2022.
Most of this selling activity can be traced to the largest holding in Berkshire’s $308 billion investment portfolio of 45 stocks, Apple (NASDAQ: AAPL)Buffett has sold Apple shares every year for the past three quarters, shedding more than 500 million shares.
While the Oracle of Omaha continues to claim that Apple is a great company with a solid management team and an industry-leading share buyback program, he opined at Berkshire’s annual shareholder meeting that corporate tax rates would likely rise from where they are now. In other words, Buffett sees value in taking profits now and paying a lower tax rate.
We’ve also seen significant selling activity in Berkshire’s former No. 2 holding company, Bank of America (NYSE: BAC). Since mid-July, Buffett has sold more than 168 million shares of BofA stock, worth nearly $7 billion. While this sale could be tax-related, there’s a possibility it’s a response to the Federal Reserve’s recent cycle of rate cuts. No money-center bank is more sensitive to interest rates than Bank of America.
But despite the continued selling of two core stocks, there are two stocks that Warren Buffett simply can’t pass up.
Occidental petroleum
The first stock the Oracle of Omaha has consistently bought since early 2022 is the oil and gas giant Occidental petroleum (NYSE: OXY)This “indefinite holding” has grown to a stake of nearly 255.3 million shares, worth $13.3 billion in market value, as of the closing bell on September 9.
The most logical reason for Buffett to buy Occidental shares is his belief that spot crude oil prices will remain high, or perhaps even go higher than they are now. After three years of reduced capital spending by global energy companies during the height of the COVID-19 pandemic, crude oil supply remains largely constrained. When in-demand energy commodities are scarce, that tends to have a positive effect on prices.
While a higher spot price for crude oil is good news for all drillers, it is especially important for Occidental Petroleum. Occidental generates the lion’s share of its revenue from its high-margin drilling segment, suggesting that a higher spot price for oil could disproportionately benefit its operating cash flow compared to its peers.
Buffett also likely appreciates the integrated nature of Occidental’s operating model. While the company derives most of its revenue from drilling, its downstream chemical business serves as a partial hedge in the event that the spot price of crude oil declines. When oil prices fall, it reduces input costs for petrochemical operations and generally increases demand for downstream related products.
Occidental has also significantly improved its balance sheet. Since acquiring Anadarko for $55 billion in 2019, it has nearly halved its net debt to $18.39 billion as of June 30. While there is still work to be done to improve Occidental’s financial flexibility, a higher spot price for crude has certainly loosened the belt a bit.
Berkshire Hathaway
The other stock that Warren Buffett can’t resist buying, despite being exceptionally selective in his purchasing behavior lately, is (drum roll) shares in his own company!
Prior to mid-July 2018, the Oracle of Omaha and his right-hand man Charlie Munger (Munger died in November 2023 at age 99) were only allowed to buy back Berkshire Hathaway shares if they fell to or below 120% of book value—no more than a 20% premium to book value, in the most recent quarter. Unfortunately, the shares never fell to or below that threshold, resulting in no buybacks.
On July 17, 2018, Berkshire’s board of directors changed the criteria for share buybacks to give Buffett and Munger more freedom to buy back their company’s stock. As long as Berkshire has at least $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Buffett believes stocks are intrinsically cheap, shares can be bought back with no ceiling or expiration date.
Over the past six years, Buffett has presided over 24 consecutive quarters of stock buybacks totaling nearly $78 billion.
Because Berkshire Hathaway doesn’t pay dividends, buybacks are Buffett’s direct way of rewarding shareholders. Reducing Berkshire’s outstanding shares incrementally increases the ownership stakes of the company’s investors, and it also encourages the long-term mindset that Charlie Munger instilled during his four-plus decades at the company.
The other benefit of stock buybacks is that, for companies like Berkshire that have stable or growing net income (without unrealized investment gains/losses), they often boost earnings per share (EPS). With nearly $277 billion in cash on hand, Warren Buffett has a strong incentive to continue buying shares of his own company.
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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. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Is a Net Seller of $132 Billion in Stocks as of October 2022, But He Can’t Stop Buying These 2 Stocks was originally published by The Motley Fool
