Buffett has spent nearly $78 billion buying shares of his favorite stocks since mid-2018.
While there are a number of prominent money managers on Wall Street, none are followed as closely by the investment community as Berkshire Hathaway (BRK.A 1.09%) (BRK.B 1.11%) CEO Warren Buffett.
One of the reasons investors are attracted to the Oracle of Omaha is its proven track record. Although he is not infallible, Buffett has overseen a total return of nearly 5,500,000% in his company’s Class A shares (BRK.A) since becoming CEO in the mid-1960s. On the basis of annual total return, which includes dividends, Berkshire Hathaway has practically doubled the return of the S&P 500 over six decades.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Another temptation for investors is Buffett’s desire to be an open book. Whether through his annual letter to shareholders or during Berkshire’s annual meetings, Buffett often shares the characteristics he looks for in “great companies,” as well as offering his perspective on the American economy.
But what Warren Buffett is perhaps best known for is his penchant for value investing. Nothing puts a smile on his face more than being able to invest his business capital into a time-tested business with a sustainable moat at an affordable price.
Although there are plenty of examples of the Oracle of Omaha grabbing stocks with amazing value throughout history, there is one stock that continues to be bought regardless of valuation.
Warren Buffett has a knack for finding amazing bargains hiding in plain sight
Despite selling more than 500 million shares of Apple ( AAPL -0.20% ) between October 1, 2023 and June 30, 2024, the largest company owned by Berkshire Hathaway represents the perfect example of Warren Buffett stumbling into an amazing company at a very affordable price.
As Buffett began building his company’s stake in Apple during the first quarter of 2016, the tech giant’s trailing 12-month price-to-earnings (P/E) ratio ranged from 10 to 12, which was well below the S&P 500 average. Dotcom, Apple shares have never been cheaper.
While its iPhone remained dominant, in terms of domestic smartphone market share, Apple’s growth was led by its services division. This is a subscription-based sector designed to keep users loyal to its ecosystem of products and services. This should also improve the company’s operating margin over the long term, as well as reduce the peaks and valleys in revenue associated with iPhone upgrade cycles.
Today, Apple is hardly a bargain. As of the closing bell on October 8, Apple shares were valued at a multiple of more than 34 times TTM earnings per share (EPS). Although Buffett hinted during Berkshire’s annual shareholder meeting in May that the reduction in his company’s stake in Apple was done for tax purposes, it is very likely that valuation played a role.
Bank of America (BAC 5.02%), No. 3 Berkshire Hathaway, is another example of Warren Buffett’s success in a time-tested business that has been historically inexpensive.
In the wake of the financial crisis, Buffett invested $5 billion in Bank of America to shore up its balance sheet and received preferred stock and warrants in return. When this investment was announced in August 2011, Bank of America was trading at less than 38% of its book value. One unwritten rule on Wall Street is to buy quality bank stocks at or below their book value and unload them at or near twice their book value.
In the years following the financial crisis, Bank of America was able to put its legal issues firmly in the rearview mirror. Moreover, it has benefited greatly from being the most interest rate sensitive among US money center banks. The 525 basis point increase in the federal funds rate by the Federal Reserve between March 2022 and July 2023 added billions of dollars in net interest income to Bank of America’s net income.
But with Bank of America shares now trading at a 16% premium to their book value, it’s perhaps not surprising that more than $10 billion in Bank of America stock has been unloaded by Buffett since mid-July.
The Oracle of Omaha is unwavering in his desire to get a good deal — with one exception.
Image source: Getty Images.
This is the one stock that Buffett continues to buy, regardless of its value
Despite spending a small fortune to build up Berkshire Hathaway’s stakes in Apple, Bank of America, Chevron, and Occidental Petroleum, there is one stock that dwarfs them all, in terms of the amount of money invested by Warren Buffett.
However, investors will not find this company listed on Berkshire’s quarterly Form 13Fs. This is the file that provides investors with a snapshot of what Wall Street’s brightest money managers have been buying and selling.
Instead, investors will have to dig into Berkshire Hathaway’s quarterly operating results to find evidence of Buffett buying his favorite stocks. At the end of each quarterly filing, just before executive certifications, you’ll find a page that lists Berkshire Hathaway stock buyback activity — because the stock Buffett keeps buying, regardless of valuation, is stock in his own company.
The Berkshire Hathaway stock buyback program has evolved slightly since mid-2018. Before July 2018, buybacks were only permitted if Berkshire Hathaway stock fell to or below 120% of its book value. Since Berkshire shares never fell below the threshold of the line in the sand, Buffett was never able to spend a penny on buybacks.
On July 17, 2018, Berkshire Hathaway’s board of directors amended the rules governing buybacks to allow Warren Buffett and then right-hand man Charlie Munger (who died in November 2023) more freedom to execute buybacks. These new, simplified rules allowed stock buybacks indefinitely without an expiration date as long as:
Berkshire Hathaway has at least $30 billion in cash, cash equivalents and US Treasury securities on its balance sheet; Warren Buffett believes that his company’s shares are intrinsically cheap.
There is a lot of leeway with this second point, which allows Buffett to regularly buy back his company’s shares. Since July 2018, Buffett has spent nearly $78 billion to buy back Berkshire Hathaway shares, including $345 million during the quarter ending in June.
Additionally, repurchases have occurred in all 24 quarters (through June 30, 2024) since these new repurchase rules were enacted. You have to go back to 2008 to find the last time Berkshire Hathaway stock was as expensive as it is now, relative to its book value… and yet Buffett keeps buying!
BRK.A price to book value data by YCharts.
Since Berkshire Hathaway does not pay a dividend, making buybacks is the easiest way for Buffett to reward his company’s shareholders and stimulate long-term thinking. A steady reduction in the number of outstanding shares of a company gradually increases the ownership stakes of long-term investors.
To boot, companies with stable or growing net income, like Berkshire, tend to enjoy increasing earnings per share while having fewer shares outstanding. This can make their shares more attractive to investors.
With Berkshire Hathaway holding an unprecedented record $276.9 billion in cash, cash equivalents and US Treasury securities, as of the end of June, the Oracle of Omaha has every incentive to keep buying back his company’s shares, regardless of the valuation.