Warren Buffett hasn’t seen much to like in the stock market lately. During the first three quarters of 2024 Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) sold $133 billion worth of shares from the portfolio he manages for the conglomerate. Although he has made a few new purchases in that time, they total only $5.8 billion.
Because many stocks have seen their prices rise faster than their underlying earnings, valuations are increasing. It’s becoming increasingly difficult to find good value on Wall Street. But if you practice patience and stick to your investment goals, you can still find plenty of opportunities.
Buffett has recently found three such opportunities, and he has poured more than $500 million into these three companies by 2024.
Buffett acquired another 8.9 million shares Western petroleum (NYSE:OXY) between Dec. 17 and Dec. 19, according to SEC filings. He paid a total of about $409 million for the shares. After the purchase, Berkshire now owns about 28.2% of Occidental, but Buffett has said he has no plans to take a majority stake in the company.
Still, Occidental is currently one of Berkshire’s largest holdings. Not only does it own 28.2% of the company’s common stock, but it also owns $8.3 billion worth of the company’s preferred stock, earning an 8% dividend. These shares include warrants to purchase up to 83.9 million shares of common stock for $59.62 each.
For a long time, Buffett bought shares of Occidental when they were trading below the price of his warrants. He let Occidental retire its preferred stock over time, while taking out the common stock below the warrant price. But he has noticeably stayed away from Occidental stock since June, despite trading well below that price for months.
But at an average price of $46 per share, Buffett seems to think it’s now worth adding to his position in Occidental. Occidental has an envious position in the Permian Basin, the cheapest source of oil and natural gas in the United States. However, a mild winter combined with pipeline disruptions led to significant price increases for natural gas transportation. Meanwhile, oil prices fell significantly from their 2022 highs.
But Occidental may be about turning things around. Third quarter results were better than expected based on strong production levels. Additionally, in early 2024, management expressed expectations that transportation prices will decline significantly, resulting in relative cost savings of $300 million to $400 million per year starting in the third quarter of 2025. It also expects its chemicals division to contribute an additional $300 million to $400 million in EBITDA once the overhaul of Battleground’s chemical plant facilities in Texas is complete.
For a company that has generated $14 billion in EBITDA over the past four quarters, an $800 million boost on top of regular operational improvements could lead to significant growth in the coming years. At a current enterprise value-to-EBITDA ratio of just 5.6, Occidental’s stock looks like a bargain. It’s no surprise that Buffett couldn’t resist adding more shares at this price.
Berkshire Hathaway has collected shares of Sirius XM (NASDAQ: SIRI) since the third quarter of last year. The conglomerate previously owned nearly $1 billion worth of stock in the company, but sold the position between 2020 and 2021. The new position is believed to be led by Berkshire manager Ted Weschler, rather than Buffett himself.
Berkshire built its position by purchasing shares of Sirius XM directly, but also purchased significant amounts of the Liberty Media tracking shares, which were sold at a discount to become Sirius When the two companies merged, Berkshire owned about $2.5 billion in stock. The additional $107 million it paid for nearly 5 million additional shares brought its total stake in the company to $2.7 billion.
Sirius XM management shared its 2025 outlook with investors earlier in December, disappointing many shareholders. It expects the company to generate revenue of $8.5 billion and EBITDA of $2.6 billion, both down from this year. On the other hand, the company expects strong free cash flow conversion to drive a slight improvement in free cash flow, most of which will be used to pay down debt.
But capitalizing on this weakness could be a great opportunity for investors. Management expects long-term free cash flow to grow to $1.8 billion from 50 million subscribers, up from about 39 million today. Many of those subscribers may come from the app-only offering that Sirius XM uses to compete with streaming service alternatives. It also sees opportunity in the fast-growing podcast advertising business and fully ad-supported offering. Declining capital expenditures will also support growing free cash flow.
The stock currently trades for about four times analysts’ consensus forecast for 2025. That’s an extremely low price for a company that generates relatively stable revenues and growing free cash flow conversion.
Buffett first acquired shares of Verisign (NASDAQ: VRSN) all the way back in 2012. He continued to build his position until mid-2014, but didn’t add more until earlier this month, when he bought the domain registration service provider for $45 million. The latest purchase brings his total stake in the company to $2.6 billion, approximately 13.6% of the company’s stock.
Verisign manages the registry rights for .com and .net domains. The company recently extended the former contract through 2030, while the .net contract runs until mid-2029. The contract gives Verisign the right to increase the price for .com and .net domains by 7% and 10%, respectively, during the last four years of their contract.
Although there are a growing number of competing top-level domains (the letters come after the period in a domain name), .com and .net remain by far the most popular. If you’re serious about having an online presence, you’ll probably want to own a .com or .net domain. That puts Verisign in a very powerful position, and it will likely take full advantage of its ability to raise prices over time.
Verisign is also not at much risk of losing its contracts. As long as it maintains certain service levels and provides critical infrastructure for the domain name system, the contracts are automatically renewed. That’s exactly what the company has been able to do since it acquired the rights in 2000. As a growing number of people and businesses build their own websites, they should see small annual growth in registrations, combined with regular increases in registration fees.
Verisign’s stock currently trades for about 23 times analysts’ consensus forecast for 2025. That’s a fair price for the stock, which should see slow and steady revenue growth over time. Importantly, profits should grow faster than revenue as price increases and the addition of new domains result in operating leverage. In a market where Buffett is finding it increasingly difficult to find good value, it makes sense that he returned to this old favorite.
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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 and VeriSign. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Just Purchased $562 Million Worth of These Three Stocks, originally published by The Motley Fool
