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Motley Fool Issues Rare “All In” Buy Alert
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Berkshire Hathaway (BRK.A -0.97%) (BRK.B -1.05%) CEO Warren Buffett has a knack for making money. Even after rolling with the punches dealt by numerous bear markets and stock market corrections since he became CEO in 1965, the Oracle of Omaha has presided over a more than 3,600,000% aggregate return for his company’s Class A shares (BRK.A) through the end of 2021. It’s jaw-dropping returns like this that have garnered Buffett quite the following from professional and everyday investors alike.
The easiest way to track what Buffett and his investment team are buying, selling, and holding is to keep tabs on Berkshire Hathaway’s Form 13F filings with the Securities and Exchange Commission. A 13F effectively provides a snapshot of what the brightest money managers (with at least $100 million in assets under management) bought and sold in the most-recent quarter.
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Berkshire Hathaway’s latest 13F for the second quarter revealed plenty of buying activity, which would be expected of the Oracle of Omaha during a bear market decline. However, it also produced two “firsts” for Warren Buffett since this century began.
The first thing to note, courtesy of data provided by 13F aggregator WhaleWisdom.com, is that energy stocks collectively accounted for more than 10% of Berkshire’s invested assets by the end of June. Aside from approaching 9% of the company’s invested assets in 2008, energy stocks have never comprised a sizable percentage of Berkshire Hathaway’s portfolio… until now.
What’s particularly interesting about this energy investment is that it’s composed of only two stocks: Chevron (CVX -4.71%) and Occidental Petroleum (OXY -4.69%). Chevron and Occidental Petroleum are Buffett’s third-and-sixth-largest respective holdings, with market values of $25.6 billion and $12.1 billion, respectively, as of Sept. 16, 2022. Keep in mind that the market value for Occidental doesn’t include the $10 billion in preferred stock yielding 8% that Berkshire Hathaway also owns.
Why did Warren Buffett decide to pile into oil stocks in 2022? The thesis appears to be the expectation that energy commodity prices will remain elevated for the foreseeable future.
Since the COVID-19 pandemic began, major energy companies worldwide have pared back their capital investments due to uncertainty. Additionally, Russia invaded Ukraine in February, providing added uncertainty to an already-challenged global energy supply chain. With no lever to pull to quickly boost production or supply to the market, it’s feasible that oil and natural gas prices will remain well above average for years to come. Chevron and Occidental Petroleum have drilling operations that’ll take advantage of higher commodity prices.
The Oracle of Omaha might also be enamored with the integrated operating model of both companies. In addition to upstream drilling and exploration, “integrated” energy companies own midstream (e.g., pipelines) and/or downstream (chemical plants and refineries) assets. Midstream companies usually generate predictable cash flow thanks to the long-term fixed-fee or volume-based contracts they rely on. Meanwhile, downstream assets benefit from lower input costs and higher consumer/enterprise demand when crude oil prices fall. In other words, these two energy stocks appear well hedged.
But if there’s one very noticeable difference between Warren Buffett’s two energy stocks, it’s their balance sheets. Chevron has what’s arguably the most rock-solid balance sheet among oil majors, with a debt-to-equity ratio of less than 17%. Comparatively, Occidental Petroleum buried itself in debt when it purchased Anadarko Petroleum in 2019. Occidental will need sustainably higher oil prices if it hopes to continue paying down its debt.
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The other “first” for Warren Buffett since the start of the century is a new low for financial stocks as a percentage of invested assets. Financial stocks include banks, insurance companies, payment processors, and credit-rating companies.
Historically, financial stocks have been Warren Buffett’s favorite sector to put his company’s money to work. For much of the past 22 years, this sector has accounted for around 40% (or more) of Berkshire Hathaway’s invested assets. But as of the end of the second quarter, financials comprised 25.56% of invested assets. That’s below the previous century’s low of 25.71%, set during the first quarter of 2009.
While it’d be easy to simply surmise that Buffett’s affection for financial stocks has faded, this doesn’t look to be the case.
To begin with, Buffett and his team have put tens of billions of dollars to work this year, with a lot of that money being used to buy shares of Chevron and Occidental. With energy stocks growing from 1.36% of invested assets to 10.9% in six months, it shouldn’t be a surprise that other sectors have fallen as a percentage of invested assets.
To build on this point, financial stocks have taken it on the chin as the S&P 500 and Nasdaq Composite each entered a bear market. Because financial stocks are cyclical, they’re often unable to escape the poor sentiment that accompanies sizable downdrafts in the broader market. As large holdings, such as Bank of America (BAC -2.61%), American Express, and U.S. Bancorp, have retraced, so has the weighting of financial stocks in Berkshire Hathaway’s portfolio.
Another reason financial stocks now make up a century-low percentage of invested assets is that Warren Buffett has been consolidating his company’s holdings within the sector. A number of well-known financial stocks have been shown the door, including JPMorgan Chase, Goldman Sachs, and Wells Fargo. The latter was one of Buffett’s longest-held stocks but was ultimately jettisoned after losing the trust of its customers following a scandal.
But even though financials make up their smallest percentage of invested assets this century, it’s crystal-clear from Berkshire Hathaway’s investment portfolio that there’s still a lot of faith in this sector. Berkshire Hathaway owns in excess of 1 billion shares of Bank of America, which is the most interest-sensitive of the big banks. As the Federal Reserve raises interest rates, no bank stock looks poised to benefit more than BofA.
Warren Buffett also continues to appreciate the cyclical nature of the sector. Even though recessions are an inevitable part of the economic cycle, periods of expansion last substantially longer. As the U.S. and global economy naturally expand over time, it allows banks, insurers, payment processors, and credit-rating agencies to benefit.
In other words, don’t overreact to financials “only” making up about a quarter of Warren Buffett’s portfolio.
Wells Fargo, American Express. JPMorgan Chase, and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Wells Fargo. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Goldman Sachs. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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