When Warren Buffett buys a stock, the world usually takes notice. For good reason — Buffett is considered to be one of the greatest investors of all time.
Over the past seven decades, he has turned an initial investment of $100,000 from family and friends into one of the world’s largest conglomerates, Berkshire Hathaway, which is today worth over $500 billion.
Warren Buffett track record
Buffett, or the Oracle of Omaha, as he is sometimes known, is a master of the stock market. Some of his greatest investments include buying Coca-Cola in the late 1980s, just before the drinks giant’s growth took off, buying American Express after the Salad Oil Scandal, and buying Bank of America after the financial crisis. Today, Berkshire’s combined investment in these three firms is over $70 billion.
The latest investing home run is Apple. The billionaire investor started buying shares in the consumer electronics giant in the first quarter of 2016. Over the next two years, Warren Buffett aggressively built up a position of more than one billion shares at prices of between $23 and $46.
Today, the stock is changing hands at around $130. That suggests a return of more than 460% on some of the initial trades in the space of just four years. Today, this holding is worth $117 billion to Berkshire.
Berkshire Hathaway reports its stock holdings every quarter in a form filed with the Securities and Exchange Commission known as a 13F.
13F insights
Any hedge fund or asset manager is required to detail its equity positions on one of these filings if it manages more than $100 million of assets.
Due to the detail these forms provide, they can be a great place to find investment ideas. However, they should only be used as a starting point for further research.
The reports only tell us the holdings in the portfolio at the end of each quarter. They do not show exactly when the holding was acquired or at what price. What’s more, they don’t tell us anything about why a manager bought or sold a holding.
It’s not unusual for an asset manager or hedge fund to report an equity position on a 13F in one quarter and then remove it (or sell it) the next, leaving investors with little to no explanation of why the trade occurred.
Nevertheless, these reports can yield interesting data when combined with other information.
Portfolio additions
According to Berkshire’s latest 13F, Warren Buffett and his team have made several significant additions to the equity portfolio over the past few quarters.
Two of these, in particular, have really attracted attention. Berkshire’s third-quarter report noted that the company was building a position in at least three stocks, which it did not want to reveal to the market. We had to wait until the fourth quarter filing to find out which positions these were.
As it turns out, the companies the group was buying during the second half of last year were Verizon Communications, Chevron Corp and Marsh & McLennan.
According to the report, at the end of 2020, Warren Buffett’s conglomerate owned just under 150 million shares of Verizon worth an estimated $8.6 billion.
It also owned $4 billion worth of shares in oil giant Chevron and $500 million worth of shares in Marsh & McLennan.
Based on this information, it seems that Buffett has been buying into the oil sector when many other investors have been selling.
Warren Buffett the contrarian
The oil and gas sector has come under significant pressure over the past 12 months for two reasons.
First of all, ESG concerns have led managers to exit polluting companies such as Big Oil. Secondly, last year the price of oil collapsed as demand slumped. At one point, producers had to pay buyers to take oil off their hands.
This had a considerable impact on the oil sector and forced businesses to dramatically scale back exploration and production activities to save money. A large number of companies also collapsed as they couldn’t generate enough cash to make ends meet.
Despite its size, Chevron wasn’t able to escape the pain. The stock has underperformed the S&P 500 by around 30% over the past 12 months. Its underperformance over the past five years is even worse. Since the beginning of 2016, the stock has underperformed the S&P 500 by 90%, excluding dividends.
Is Chevron undervalued?
The $4 billion investment in the company suggests Warren Buffett thinks Chevron is now undervalued. It could also be a sign that he believes the entire oil and gas sector is undervalued.
Chevron is one of the world’s largest oil and gas companies, but it is not the only sector investment Berkshire has made over the past few years.
At the beginning of 2019, the Oracle of Omaha completed one of his most significant deals in recent years. Berkshire Hathaway committed $10 billion for preferred stock in Occidental Petroleum to help fund its buyout of Anadarko Petroleum.
Warren Buffett’s company received 100,000 shares of cumulative perpetual preferred stock with a value of $100,000 a share. The preferred stock has an annual coupon of 8%.
On top of this, the conglomerate also received a warrant to purchase up to 80 million shares of Occidental at an exercise price of $62.50 a share.
Since the deal closed, Occidental’s share price has lost around two-thirds of its value.
Still, despite this performance, the deal enabled Warren Buffett to deploy a large chunk of Berkshire’s cash at a high return rate (8%).
Around six months after the Occidental deal was announced, Berkshire Hathaway purchased a gas pipeline network from Dominion Energy for $9.7 billion.
As part of the transaction, the group picked up about 7,700 miles worth of natural gas transmission pipelines, extensive natural gas storage facilities, and part ownership of the LNG export facility Cove Point.
Direct and indirect
In these three large deals, Warren Buffett and Berkshire have deployed nearly $25 billion in the oil and gas space over the past three years.
Those are just the direct investments.
In August 2020, one of Berkshire’s subsidiaries announced that it had taken stakes in five of Japan’s biggest trading companies, Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. The total value of this investment was more than $6 billion.
Commodities trading is one of the main lines of business for these firms, and several have ownership stakes in oil and gas projects.
Mitsui and Mitsubishi hold interests in Sempra Energy’s Cameron LNG export terminal in Louisiana, and Sumitomo Corp. has a stake in Cove Point.
These direct and indirect oil & gas investments amount to $31 billion. That seems to suggest that Warren Buffett is betting that these essential commodities won’t become irrelevant any time soon.