When Warren Buffett speaks – via Berkshire Hathaway & # 39; s (NYSE 🙂 quarterly reports or via his long-awaited annual letter to shareholders released last weekend – investors are paying, whether they are stakeholders in Buffett's multinational conglomerate holding or not, close attention.
Dubbed as "Omaha's Oracle" because of its legendary value as a value investor, Berkshire Hathaway's CEO has built a reputation for retrieving undervalued equities from otherwise strong companies and keeping them profitably for years through his company's portfolio .
The brilliance of his game plan can be seen in the table above. In the past 40 years, while the respectable grew 2638%, BRKa returned no less than 116.553%.
But Q4 2018 was not particularly good for Berkshire; the value of his portfolio fell by $ 38 billion, or 17%, from $ 221 to $ 183 billion. The portfolio contains 48 shares; The main positions of Buffett are currently Apple (NASDAQ), Bank of America (NYSE 🙂 and Wells Fargo (NYSE :).
The whole market took a dip when 2018 came to an end, making the S & P 500 only 1.89% in the past 12 months; BRKa did even worse and lost 3.51% over the same period. But quarterly ups and downs do not seem to thwart Buffett. As he often says, he is there for the long term.
That is why what he buys and sells remains important for investors. We think that three movements in the past quarter are particularly intriguing:
1. Banks
Buffett is also a renowned believer in the US economy, who has praised it in his annual shareholders' letters. His recent movements prove that point.
The American financial sector accounts for 45% of Berkshire's interests. Even in the fourth quarter, when Fed chairman Powell became moderate and moderated expectations for future interest rate hikes (and hurt future profitability for banks), Buffett opted for the sector. Berkshire Hathaway increased its stake in Bank of America, US Bancorp (NYSE), JPMorgan Chase & Co (NYSE), PNC Financial (NYSE) and Bank of New York Mellon (NYSE :).
In particular, the JP Morgan holding, which was initiated in the third quarter, grew by 14.4 million shares at an average price of $ 106 (trading at $ 106.10 yesterday) and added $ 1.52 billion to the position. Berkshire's BAC position rose by 18.9 million shares at an average price of $ 27 ($ 29.27 as of yesterday's closing), adding $ 510 million to the position, leaving Berkshire close to 10 % threshold came. If it exceeded more than 10%, government regulations would require Berkshire to be re-classified as a bank holding, something it wants to avoid. For this reason, Berkshire has also reduced the position of Wells Fargo (NYSE 🙂 by 3%.
Buffett's motives on these financial positions: although interest rates play a crucial role in the profitability of the financial sector, which makes an environment with a constantly low interest rate less ideal in the short term, Berkshire has positioned itself to benefit in the longer term of US economic growth. As far as individual equities are concerned, JP Morgan is perhaps the leader in American banking law, now plus it has a reasonable valuation with a K / W ratio of 11. It also pays a nice dividend, good for 3%. That makes it easier to wait patiently until Powell and others decide to keep raising rates.
2. Technology
Tech shares are the locations where old watchmakers from Berkshire can see the passing of the torch to the next generation of managers. The 88-year-old Buffett is known for generally avoiding technology stocks, but in recent years positions in technology-oriented companies within the Berkshire portfolio have grown. Three years ago, for example, Apple became Berkshire's largest single holding, valued at about $ 40 billion dollars. Still in the last quarter 2.9 million shares of the iPhone manufacturer were sold at an average price of $ 192 ($ 174.23 today).
Red Hat (NYSE :), an open source cloud company acquired last October by IBM (NYSE :), has been added. It is an interesting step since Berkshire announced last May that it had sold its long-term IBM position with a value of several billion. Berkshire bought 4.1 million Red Hat shares at an average price of $ 160 ($ 182.40 today). According to the filing, Berkshire started buying Red Hat before the announcement of the acquisition.
The big news in the past quarter, however, was the liquidation of Berkshire's Oracle (NYSE 🙂 stake. In the third quarter, the holding company took a $ 2.1 billion position in Oracle to fully sell within a few months, a previously unheard-of move for Buffett.
What to make of all this? The cuts in the Apple position are of little importance … until now. Berkshire still owns $ 40 billion worth of Apple shares. Although the technology company struggled in the fourth quarter, its valuation multiplicity (P / E ratio of 14) in combination with its $ 245 billion war coffers would have allowed each Apple investor to sleep relatively well.
Red Hat shares after the acquisition are another matter. IBM had to pay a premium of 63% to acquire Red Hat, making the shares much more expensive. Moreover, now that they fall under IBM's umbrella, we do not see that as a good deal for the longer term.
Oracle's fiasco also asks us if it was not one of Buffett's lieutenants who opened the position last quarter, only to have Buffett – who is not interested in another aging technology company with stagnating income and strong competition in the cloud space – close it.
3. A surprising game increase
While large movements in the financial and technology sectors, which make up 67% of Berkshire Hathaway's portfolio, are expected to be 2 million extra shares, for a 37% increase in General Motors (NYSE :), which closing at $ 40.14 yesterday, comes as a complete surprise. With an average purchase price of $ 34 per share, Berkshire added $ 680 million to its GM interest, which now stands at $ 2.4 billion.
Was this unexpected move a good one? This is difficult to assess, but it certainly plays a part in Buffett's investment strategy. The Detroit-based automaker is cheap, with a P / E ratio of 6, and pays a 3.8% dividend. And again he has bought the American, who is praised in his latest shareholder letter as an extraordinary & # 39; land because of the many business achievements.
