For nearly six decades, Warren Buffett, the CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has consistently outperformed Wall Street’s major stock indexes in terms of returns. Since taking over as CEO in the mid-1960s, Buffett has led Berkshire Hathaway’s Class A shares (BRK.A) to an impressive increase of around 5,075,000%, compared to the S&P 500’s total return, including dividends paid, of approximately 33,700%.
Following Buffett’s investment strategies has been a lucrative endeavor for investors, facilitated by the mandatory quarterly filings known as Form 13F with the Securities and Exchange Commission. These filings provide detailed insights into the buying, selling, and holding activities of institutional investors with at least $100 million in assets under management.
Warren Buffett’s recent moves, as evidenced by Berkshire Hathaway’s latest 13F filing and the company’s annual earnings report, reveal a clear intention to divest from two well-known companies in its $368 billion investment portfolio. Concurrently, there are two enduring companies that have captured the Oracle of Omaha’s attention, as evidenced by his continued accumulation of their shares.
Warren Buffett and his team are likely sending two brand-name companies to the chopping block
Warren Buffett’s investment strategy is renowned for its predictability. When he identifies a company as a value buy, he and his team gradually accumulate stakes over multiple quarters, often holding onto them for years or even decades.
Conversely, if Buffett, along with his investment deputies Ted Weschler and Todd Combs, loses confidence in a company, they swiftly reduce their position over a few quarters. This is precisely the pattern unfolding with two stocks likely facing expulsion from Berkshire Hathaway’s investment portfolio: Media giant Paramount Global (NASDAQ: PARA) and personal-computing (PC) and printing-solutions specialist HP (NYSE: HPQ).
The substantial divestment of more than 30.4 million shares of Paramount Global in the quarter ending December unmistakably signals that the remaining 63.3 million shares are poised to be offloaded in the near future.
One significant concern surrounding Paramount is its balance sheet. By the close of 2023, the company held $14.6 billion in long-term debt, compared to just $2.46 billion in cash and cash equivalents. Although it generates positive cash flow, mounting losses from its expanding streaming segment, compounded by the potential impact of rising interest rates, cast doubt on its ability to manage its debt burden.
Moreover, the advertising market has been challenging, with businesses scaling back their ad spending amid expectations of a looming recession in 2023. Although this recession did not materialize, legacy TV operators like Paramount heavily rely on advertising revenue, making them vulnerable to fluctuations in the market.
Similarly, Berkshire’s 13F filings reveal a significant reduction in its HP holdings, with close to 79.7 million shares sold off during the fourth quarter. Once standing at over 100 million shares, Berkshire’s HP position has dwindled to approximately 22.85 million shares as of December 31, 2023, likely to be fully liquidated by the end of the first quarter.
Buffett’s change in stance on HP likely stems from the lack of a sustained rebound in PC sales. While sales surged during the early stages of the COVID-19 pandemic when remote work was prevalent, they have since declined as life returned to normalcy. With no clear indication of a bottom in PC demand, HP’s sales could face a second consecutive year of decline.
Furthermore, HP’s profitability has been largely driven by cost-cutting measures and share repurchases. Although its forward-year earnings multiple remains relatively low at just over 8 times, there are limited catalysts beyond cost reduction and stock buybacks. Buffett and his team may believe that Berkshire’s cash would be better utilized in short-term Treasury bills rather than yielding a relatively modest return with HP.
The two phenomenal stocks Warren Buffett can’t stop buying
Despite Warren Buffett’s consistent trend as a net seller of equities over the past five quarters (from October 1, 2022, through December 31, 2023), he has been actively acquiring shares of two established stocks at a rapid pace.
In the first instance, Buffett and his team have been accumulating shares of satellite-radio operator Sirius XM Holdings (NASDAQ: SIRI) for two consecutive quarters. The addition of approximately 30.56 million shares in the quarter ending December represented a more than quadrupling of Berkshire’s stake in the company.
Sirius XM’s appeal lies in its status as the sole licensed satellite-radio operator. While it competes with terrestrial and online radio providers for listeners, its legal monopoly grants it significant pricing power in subscriptions.
However, what sets Sirius XM apart is its revenue structure. Unlike online and terrestrial radio operators heavily reliant on advertising, only 20% of Sirius XM’s revenue came from ads in 2023, with the majority (77%) derived from subscriptions. This subscription-based model, less susceptible to economic downturns compared to ad-dependent businesses, positions Sirius XM favorably in any economic climate.
At a price of 11 times forward-year earnings, Sirius XM stock is currently trading at historically low levels.
The other stock Buffett has been consistently acquiring isn’t listed in Berkshire’s 13F filings—it’s shares of his own company. During the fourth quarter, Buffett authorized the repurchase of $2.15 billion worth of Berkshire Class A and Class B (BRK.B) stock, adding to the more than $74 billion in buybacks conducted over 22 quarters.
Berkshire Hathaway’s share repurchase program is appealing due to its absence of a ceiling. The board clarified in July 2018 that there would be no cap on buybacks as long as Berkshire held at least $30 billion in cash, cash equivalents, and marketable securities, and Buffett deemed shares to be undervalued.
Given Berkshire’s lack of dividend payouts, share buybacks represent Buffett’s primary means of rewarding long-term investors who share his vision. The steady reduction in outstanding shares also contributes to boosting earnings per share (EPS) for companies like Berkshire Hathaway with steady or growing net income, making them more attractive to value-oriented investors.
