Buffett is Buying – Week in Review

Buffett is Buying – Week in Review

Buffett is Buying

Buffett is famously known for his quotes and quips. He seemingly has one for every occasion. Some of it is sage advice about buying stocks. For instance, 

Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,

or

The sillier the market’s behavior, the greater the opportunity for the businesslike investor.

Buffett is talking about buying stocks or even entire companies on sale. However, for an investor to effectively do so at low valuations, they need dry powder, meaning cash. In Buffett’s case, he refers to his substantial pile of money on Berkshire’s balance sheet.

Buffett has recently put the cash pile at Berkshire to work, buying stock and entire companies. So what exactly is Buffett buying and why?

How Much Dry Powder Does Buffett Have?

In Warren Buffett’s 2021 Annual Letter, there was $144 billion on the balance sheet at Berkshire Hathaway (BRK.A, BRK.B). This amount is an enormous sum, and it is all in cash or short-term cash equivalents. Additionally, the amount is much more than the $30 billion minimum Buffett and Munger have said they would maintain.

To put this dollar amount into context, Buffet could buy all of Amgen (AMGN), CVS Health (CVS), or Lowe’s (LOWE) and still have a couple of billion leftover. Amgen is the 109^th largest company by market capitalization.

What is Buffett Buying?

Buffett is on a veritable buying spree. In about 30 to 60 days, Buffett has deployed billions in cash on energy, insurance, and technology. This activity goes with the four focus areas of Berkshire of insurance, energy, industrial and railroads, and tech. So, what exactly is Buffett buying so rapidly in early-2022?

Occidental Petroleum

Buffett has been adding to his holdings in Occidental Petroleum (OXY). Buffett helped finance OXY’s purchase of Anadarko in 2019 for $55 billion, including debt. Unfortunately, this purchase was down at precisely the wrong time as the company faced low oil prices, and then OXY had to cut the dividend twice.

However, Buffett got $10 billion in preferred shares with an 8% coupon. This deal was a great one since the dividend on the preferred shares was not cut. During the COVID-19 pandemic, OXY could not pay the dividend, so Buffett got stock at a 10% discount. At the end of 2021, this $10 billion was carried at $10.7 billion. The value is higher now since the stock price doubled since the end of 2021.

In March 2022, Buffet added to his holdings by purchasing common stock. He bought shares of common stock at prices ranging from $51.03 to $58.08. As a result, Occidental’s share price rose about 9% when announced. Buffett now owns 118.3 million shares of common stock, or roughly 12% of the company. When combined with the warrants from the Anadarko deal for another 84 million shares, Buffett owns nearly 20% of OXY. The warrants have an exercise price of $59.624, and the stock price at close this past Friday was $61.80.

The lesson learned is Buffett gets better deals than the rest of us, and don’t bet against him.

Allegheny Insurance

The following company Buffett bought recently was Allegheny Corporation (Y) for $11.6 billion cash. The deal is expected to close by the end of 2022. Allegheny is a reinsurance, insurance, and capital firm. Buffett is paying an ~25.3% premium at $848.02 per share.

This deal adds to Berkshire’s already substantial insurance operations. The company owns or controls GEICO, Gen Re, Cologne Re, NRG, and Berkshire Hathaway Assurance.

Few companies can compete with Berkshire’s financial strength in insurance. All the companies had a credit rating of ‘AAA,’ which is prime and is rated A++ (superior) by A.M. Best.

Hewlett-Packard

This past week, Buffett announced it owned roughly 121 million Hewlett-Packard (HPQ) shares worth about $4.2 billion. This number represents about 11.5% of the company. The share price went up about 17% once the holdings were announced. As a result, the stock price is at a record high exceeding its prior all-time peak during the dot-com boom.

Buffett has historically stayed away from tech since he claims it is hard to predict winners. However, he is one of the largest shareholders of Apple (APPL), owning about 5.6% of the company. Buffett is earning hundreds of millions in dividends from Apple. This fact may have given him a taste for tech.

In any case, Hewlett-Packard was undervalued at low price-to-earnings (P/E) ratio < 9.0X and returning cash to shareholders through dividends and share repurchases, making it attractive. Furthermore, the company has a strong position in personal computing and printing. It is trying to become a player in 3-D printing and digital manufacturing.

Lastly, Buffett probably liked the financial statement. The balance sheet is conservative, with low leverage and high-interest coverage. Additionally, Hewlett-Packard has more than $6 billion in free cash flow (FCF) annually.

Why is Buffett Buying?

Buffett is buying since he sees deals. Despite the mountain of cash on Berkshire’s balance sheet, he remains disciplined. He has not made a series of buys like this in several years. So one can conclude he sees value in the market today.

Although the stock market is not undervalued based on the historical average, it is better valued than in 2021. Dividend Power tracks the P/E ratio of the S&P 500 Index, and it is down from more than 35X at the end of 2021 to just above 25X. This decline is a significant one. Furthermore, investors should remember it is a market of individual stocks, and thus some are overvalued, and some are not. Therefore, investors should be selective and disciplined.

Next, Buffett obviously sees value in energy stocks. Energy prices from oil, natural gas, and coal are all surging. Oil is trading just below $100 per barrel, down from its recent peak, but it is still well above the breakeven point for even the most inefficient oil producers. Moreover, the Black Swan events of COVID-19 followed by the Ukraine conflict means supply is constrained. This point is unlikely to change much in 2022, suggesting energy companies will have an excellent year.

Final Thoughts on Buffett is Buying

Studies have shown that following Buffett’s moves is a good strategy. In addition, many investors follow his portfolio hoping to think and invest like Buffett. Some investors like Stewart Horejsi and the Othmers were extremely successful investing with Buffett but investing like him is probably the next best thing. Next, value is back in vogue after trailing growth for three years. According to StockRover*, the Russell 1000 Value ETF (IWD) is flat for the year, while the Russell 1000 Growth ETF (IWF) is down (-11.6%). 

From late December to early March, investors had an opportunity to pick up some deals in value stocks due to volatility caused by the expectation of interest rate hikes and the Ukraine conflict. As a result, dividend Power wrote about or highlighted many undervalued stocks during that time, and many have gained since then.

The Stock of the Week

Today we highlight the highest yielding Dividend Champion, Enterprise Products Partners LP (EPD). The stock is a Master Limited Partnership (MLP). The forward dividend yield is about 7.05% and decently covered by earnings with a payout ratio of about 84%. The stock price is up about 22% year-to-date (YTD) but is arguably still undervalued based on historical multiples. The company has a dominant position in natural gas liquids (NGL) and petrochemicals. In our last EPD stock analysis, we stated a fair value estimate is $29.41; the stock is trading at $26.40 today.

The screenshot below is from Stock Rover*.

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of March 2022. As a result, the number of companies on the list has risen to 548. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Four new additions indicate companies are experiencing solid profits and cash flow in March.

The new addition was Orchid Capital (ORC), Lument Financial Trust (LFT), 360 Digit Tech (QFIN), and James River Group Holdings (JRVR).

Market Indices

04/09/22

Dow Jones Industrial Averages (DJIA): 34,721 (-0.28%)

NASDAQ: 13,711 (-3.86%)

S&P 500: 4,488 (-1.26%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 25.59X, and the Schiller P/E Ratio is about 36.37X. Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively. 

The market is still overvalued despite the recent market correction and rebound. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

Shiller PE Ratio History

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was up about 1.5 points to 21.16. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

Economic News

The Commerce Department reported that new factory orders fell in February for the first time in nine months. New orders decreased $2.7B or 0.5% to $542.0B. New orders for durable goods decreased 2.1% to $271.7B. The decline in new factory orders was a 5.3% drop in transportation equipment. Orders for motor vehicles and parts declined 0.6%. In addition, both machinery (-2.9%) and computers and electronic products (-1.1%) saw significant declines in new orders. Offsetting the declines were increases in furniture and related products (+ 2.7%) and electrical equipment, appliances, and components (+0.6%). New orders for manufactured nondurable goods increased 1.2% to $270.3B.

Minutes of the Federal Open Market Committee, March 15 – 16, 2022 meeting reported that members agreed that the Federal Reserve would have to take a more aggressive approach in shrinking its balance sheet than in 2017 – 2019. Specific to balance sheet reduction, the minutes showed that “Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over three months or modestly longer if market conditions warrant.” Finally, addressing interest rates – “Many participants noted that—with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50-basis point increase in the target range for the federal funds rate at this meeting.”

The Labor Department reported a decrease in initial jobless claims for the week ending April 2nd. The department noted that the benchmarks from 2017 to 2021 have been recalculated to adjust for new seasonal factors. The seasonally adjusted initial claims were reported at 166,000, a decrease of 5,000 from the previous week’s downwardly revised level. The last week’s initial claims value was significantly changed from 202,000 to 171,000. Initial jobless claims are now at their lowest level in 53 years.

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Published at Sun, 10 Apr 2022 04:00:00 -0700