Despite being a net seller of stocks to the tune of $166 billion over the last eight quarters, there are two premier stocks the Oracle of Omaha can't stop buying.
Few if any billionaire money managers are more revered on Wall Street than Berkshire Hathaway's (BRK.A 0.30%) (BRK.B 0.24%) CEO Warren Buffett. Since ascending to the role of CEO in the mid-1960s, the Oracle of Omaha has overseen a cumulative return that surpasses 5,771,000%, as of the closing bell on Nov. 22.
One of the reasons investors appreciate Buffett so much is his willingness to be open and candid about stocks and the U.S. economy. He regularly lays out the characteristics he looks for in "wonderful companies" in his annual letter to shareholders, as well as during Berkshire's annual shareholder meetings.
But what might come as a bit of a surprise is that Warren Buffett has been a decisive net seller of stocks for eight consecutive quarters, to the tune of $166.2 billion. This selling activity appears to be a clear warning that stocks are historically pricey and value is hard to come by.
However, this doesn't mean all buying activity has ceased. Since 2018, Warren Buffett has put close to $91 billion of his company's cash to work in the following two unstoppable stocks.
Since July 2018, there's not on a stock on the planet Warren Buffett has bought with more frequency than shares of his own company. He repurchased shares of Berkshire Hathaway for 24 consecutive quarters -- a streak that ended in the September-ended quarter -- with these aggregate buys totaling almost $78 billion. Put another way, Berkshire's chief spent more buying his own company's stock than he did purchasing shares of Apple and Bank of America at cost, on a combined basis!
Prior to the midpoint of 2018, it was virtually impossible for Warren Buffett to repurchase shares of his company's stock. The rules governing buybacks required Berkshire's shares trade at or below 120% of book value for repurchases to be made. This is a threshold that Berkshire Hathaway's stock simply never reached, which led to no buyback activity.
But on July 17, 2018, Berkshire's board amended the buyback rules to give its chief and then right-hand man Charlie Munger, who passed away in November 2023, more liberty to take action. The new rules allowed for unlimited share buybacks with no end date as long as Berkshire has at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Buffett views his company's stock as intrinsically cheap.
Since Berkshire Hathaway doesn't pay a dividend, share repurchases are the easiest way for the Oracle of Omaha to reward investors. Buying back stock over time is incrementally increasing the ownership stakes of investors and encouraging the long-term thinking that Buffett and his top advisors hold so dear.
Furthermore, a regular diet of share repurchases for a company with steady or growing net income, such as Berkshire Hathaway (sans unrealized investment gains/losses), should provide a lift to earnings per share (EPS). In short, buybacks are helping to make Berkshire more fundamentally attractive to investors.
However, Berkshire's stock has, in recent months, been trading at its highest multiple to book value since 2008. With Warren Buffett being an ardent value investor, it's perhaps not a surprise that he chose to pass on repurchasing shares of his company in the latest quarter.
The second unstoppable stock that Warren Buffett has been buying hand over fist in recent years is energy goliath Occidental Petroleum (OXY -1.17%). Based on an estimated cost basis of $50.40 per share, according to 13F aggregator WhaleWisdom.com, the nearly 255.3 million shares of Occidental Buffett has purchased since the start of 2022 equates to a $12.9 billion investment.
The Oracle of Omaha and his team wouldn't put this amount of money to work in an integrated oil and gas stock without a rock-solid investment thesis. What we're witnessing is a very clear wager on the spot price of crude oil rising over time.
During the COVID-19 pandemic, energy majors around the globe were forced to slash their capital expenditures due to a historic drawdown in demand. Roughly three years of reduced capital expenditures will make it difficult to quickly ramp up the global production of crude oil anytime soon. When coupled with Russia's invasion of Ukraine, it's created the perfect storm of sorts to lift the spot price of crude oil.
Higher energy commodity prices are particularly important for Occidental Petroleum. Although it's an integrated operator that also brings in revenue from its downstream chemical plants, Occidental generates a disproportionate amount of its operating cash flow from its upstream drilling segment. Just keep in mind that this pendulum works both ways -- i.e., its cash flow can be disproportionately harmed if the spot price of crude oil declines.
It's also worth noting that Buffett's company is holding warrants to purchase 83,858,848 common shares of Occidental at an exercise price of $59.624 per share. Warrants are what allowed Buffett to generate billions of dollars in profit by purchasing 700 million shares of Bank of America stock at an exercise price of just $7.14 per share in the summer of 2017. It's in Berkshire's best interest if Occidental's share price stays above the $59.624 exercise price, which may be encourage plenty of buying activity on Buffett's part.
But at the end of the day, Occidental is anything but a typical Buffett investment. It closed out the September quarter with close to $25.5 billion in net debt, which is quite a bit of leverage for a company tied at the hip to the spot price of crude oil. The Oracle of Omaha usually shies away from deeply indebted companies -- even if they provide a basic necessity like oil.