There is a simple adage in investing: Buy Low, Sell High.
This has been the simple mantra for two of the most successful investors in the history of financial markets- Warren Buffett and Charlie Munger.
The two gentlemen have spent a combined 189 years on this planet. They have seen a lot of fads come and go. Investors should not dismiss the two as being out of touch with the new reality. Their long track record of success means their words and actions deserve consideration.
Over the past weekend, the two gentlemen held court at Berkshire Hathaway’s annual shareholders’ meeting. The event, dubbed “Woodstock for Capitalists”, returned after a two-year COVID-induced hiatus. The comments and actions were notable.
Markets have been under pressure in 2022. The Nasdaq Composite entered a bear market, down 23% from highs, after the April crash. The S&P is down approximately 13% in 2022. The Dow has been the steadiest performer as it is down only 9%.
Buffet and Company have been buyers while investors are panicking. Berkshire purchased $51 billion in equities in Q1. It sold approximately $10 billion of shares meaning it bought $41 billion net. The spending spree lowered its near-record cash hoard to $106 billion from $147 billion. This is the lowest level for the company since the third quarter of 2018. It still has ample purchasing power.
To fund the investments, Berkshire sold Treasuries and other securities worth more than $44 billion mature in the quarter.
It is a dramatic shift for an investor that has been a seller of stocks for the past two years. Buffet and Co have struggled to put cash to work in higher-returning assets due to stiff competition from buyers which drove valuations out of Berkshire’s ballpark. Buffet warned of high valuation and the lower potential returns which thwarted his stock-buying efforts.
The pullback has offered a more attractive entry. The vote of confidence from Buffet should help ease investor’s concerns as we move into the Fed rate hike cycle.
Berkshire has not been this significant of a buyer of stock since 2008. That may have been a little early as markets did not bottom until March of 2009, but it still proved to be a great entry point for many names.
The current volatility leads to a situation of asset price dislocations that create opportunities for value players like Buffett. In Q1, he unleashed the company’s cash hoard after an extended lull.
The purchases included a big increase in holdings of energy names Occidental Petroleum (OXY) and Chevron (CVX). Berkshire acquired an 11.4% stake in HP (HPQ). It added to its Activision (ATVI) position, an arbitrage play as Microsoft (MSFT) is set to acquire the video game developer.
The ATVI play is interesting. ATVI shares are trading at $78, well below the $95 MSFT offered to pay for the company. Investors are concerned that the FTC, led by Lina Kahn, could block the deal. Buffett said he was keen to take advantage of the mispriced asset. If he is correct, then it marks an ‘easy’ $17 (approximately 20%) profit. Berkshire holds a 9.5% stake in ATVI.
The company holds a $25.9 billion stake in Chevron making it a top 5 holding in its $390 billion portfolio. Shares of CVX rallied from $115 in the quarter to the $175 level. It has pulled back to the $155 area. CVX trades at 12x forward earnings and pays an attractive 3.56% dividend.
Approximately $7 billion of the money went to OXY, bringing Berkshire’s stake to 14% in the oil producer. Shares of OXY ripped higher during Q1. The stock broke above its 200-weekly in late February as Russia invaded Ukraine and drove energy names higher. OXY ran to the $60 area where it is fighting to hold gains. The stock trades at 8.5x forward earnings, making it the type of value play Buffett craves.
The company also purchased Alleghany Co for $11.6 billion in cash.
Buffett is known to be nimble when mispriced opportunities arise. The actions taken by Berkshire were classic Buffett as he waited patiently for names to come back to levels where he felt comfortable buying.
Investors should pay heed to the Oracle as his methodology has proven to be a formula for success. Both CVX and OXY stand out as great value plays with further upside potential. CVX is particularly attractive given its dividend yield.
Berkshire may prove to be a little early as it was in 2008. Markets remain volatile and there is a downward bias on the tape.
However, the idea of buying cheap is a tried-and-true strategy for investors. The market price action is ugly but that should not stop you from putting together a list of names you want to buy at certain levels. Listen to Warren and Charlie and leave the ageism for the speculators.