Why Is Lord Buffett Suddenly Buying The Dip?

Why Is Lord Buffett Suddenly Buying The Dip?
Stéphane Renevier, CFA

almost 2 years ago4 mins

  • Buffett only buys the best companies – those whose strong competitive advantage will allow them to dominate their markets for decades. Companies like Coca-Cola, Kraft Heinz, Bank of America, or Apple.

  • But Buffett doesn’t just buy great companies, he buys great companies at attractive prices. After years spent mostly on the sidelines, he’s investing a record amount into shares of Occidental Petroleum, Chevron, Activision, and HP.

  • To invest like Buffett, you can buy Berkshire Hathaway’s total list of stock holdings, invest in just its latest buys, or buy shares in Berkshire Hathaway itself.

Buffett only buys the best companies – those whose strong competitive advantage will allow them to dominate their markets for decades. Companies like Coca-Cola, Kraft Heinz, Bank of America, or Apple.

But Buffett doesn’t just buy great companies, he buys great companies at attractive prices. After years spent mostly on the sidelines, he’s investing a record amount into shares of Occidental Petroleum, Chevron, Activision, and HP.

To invest like Buffett, you can buy Berkshire Hathaway’s total list of stock holdings, invest in just its latest buys, or buy shares in Berkshire Hathaway itself.

Mentioned in story

Warren Buffett’s conglomerate Berkshire Hathaway wasn’t exactly keen on stocks during the pandemic, saying openly that it thought stocks were way too high. Now that markets have stuttered, though, it’s been using the dip as an opportunity to buy $51 billion worth of stocks – the most it’s snapped up in a single quarter since 2008. So let’s take a look at why the Oracle of Omaha has suddenly decided to start buying again, and what’s on the shopping list.

Why is Buffett buying now?

Buffett is widely considered the most successful investor of the 20th century. He’s also known to be a contrarian, buying when others are selling. He buys aggressively when the prices of the companies he likes “fall into his lap” (his expression, not mine), but stays on the sidelines when they don’t.

Since the global financial crisis, the market’s seen rapidly rising stock valuations and more competition from private equity groups. And that’s meant fewer opportunities that meet Buffett’s selective criteria. So, rather than buying good companies at bad prices, Berkshire’s been amassing an impressive investment war chest, ready to be deployed when the time is right.

Buffett's finally been putting some of that cash to work. Source: Financial Times
Buffett's finally been putting some of that cash to work. Source: Financial Times

This year, with higher interest rates and inflation weighing on the market, it appears that timing element has fallen into place. Buffett used almost a third of that cash pile to buy stocks in the first quarter – it seems that some great companies can finally be bought at an attractive price.

So what’s Buffett been buying?

If there’s one sector Buffett seems to find particularly appealing right now, it’s energy. Berkshire has increased its holdings in both Occidental Petroleum (ticker: OXY) and in Chevron (ticker: CVX), which now represents its third-largest position.

Both are a good hedge against inflation: their revenues directly benefit from higher energy prices. But Chevron has some other star points as well: It’s got an an exceptional management team (a must for Buffett), a high and stable dividend (it has consistently grown its dividend and unlike other oil majors, it didn’t cut it in 2020), plus above-average return on its capital invested. The fact that the business operates across the entire supply chain (it’s “fully integrated”) also makes it better able to roll with the punches when there are higher input costs or supply chain hiccups.

Outside of energy, Berkshire has taken a perhaps even more interesting position in Activision (ticker: ATVI), the video game producer behind “Call of Duty” and “World of Warcraft”. This one’s a pure merger arbitrage play: Microsoft agreed to buy Activision at a price of $95 a share, but the stock is currently trading at only $78. If the deal goes through (as expected), Buffett can expect a return of 21% at current prices – a gain of about $1.2 billion on that $5.6 billion investment. Nice.

The last significant addition was HP (ticker: HPQ), with Buffett buying an 11.5% stake in the computer and printer maker. While not exactly growing at a breathtaking pace, HP is a mature and defensive business, paying a high dividend yield (about 2.6% expected next year) and benefiting from stable cash flows and above-average margins. It’s technically a tech stock, but it doesn’t tend to fluctuate that much with consumer spending and could prove quite resilient if the economy slows.

What else is in the portfolio?

Buffett is a conservative, analytical investor who likes to invest in companies that have a distinct advantage – what he calls an “economic moat” – over their rivals. More than growth-at-all-costs or value-at-all-costs, he puts more emphasis on buying companies that are in a position to dominate their markets for decades.

So no wonder Berkshire’s top holdings include American bellwethers like Coca-Cola, Kraft Heinz, Bank of America, and American Express. Its largest position of all, Apple, also isn’t that surprising when you look at it: the company boasts attractive margins and strong cash flows, and it’s growing its dividend at a rapid pace.

Buffett's current portfolio (estimate). Source: CNBC
Buffett's current portfolio (estimate). Source: CNBC

So what’s the opportunity here?

The 91-year-old Buffett has never claimed to be a master at timing the markets, but his track record shows he’s good at increasing his positions when stocks are cheap, and building a cash buffer when they’re overvalued. So if Buffett is buying stocks again, that suggests not all stocks are overvalued.

Paying attention to what Buffett buys is just as important as when he buys. His preference now for recession-resistant and inflation-resistant stocks, for example, shows he is likely concerned about the threat of stagflation, the far-from-ideal combo of high inflation and low growth.

If you want to invest like Buffett, the good news is you can. Buffett tends to hold his positions for several quarters or, in some cases, years. You could replicate what he does, even weeks after he does it. The list above and the four stocks we highlighted are a good place to start. Or, you could simply buy Berkshire Hathaway (ticker: BRK-B), to own the same portfolio as Buffett. There are certainly worse companies to own…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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