Reading the "tea leaves" from Buffett’s 2022 Q1 portfolio changes

WELREX Director John Longo shares his views on Buffett’s recent portfolio changes

In the wreckage, there is value in the market for long-term investors. That’s my take on Buffett’s latest moves, as revealed in Berkshire’s most recent 13F filing, released on May 16th. Buffett reduced Berkshire’s enormous cash pile by $41.5 billion, the most since The Great Recession period of 2008. Here’s some of what he bought and sold and my analysis of what it all means.

Buffett adds Citi and exits Wells Fargo

It was something of a surprise that Buffett put nearly $3 billion into Citigroup, especially since he finally exited his longstanding stake in Wells Fargo, which he had held for more than 20 years. A position of this size most likely was selected by Buffett himself, rather than one of the co-CIO’s in-waiting at Berkshire, Todd Combs or Ted Wechsler. Buffett never reveals who made a particular buy or sell decision, but multi-billion investments usually have Buffett’s fingerprints on them. What might Buffett like in Citi? The stock is extremely cheap by historical standards, trading at roughly 50% of book value, 6x trailing earnings, and 7x forward earnings, while sporting a 4% dividend yield. Even if we head into a recession over the next year, today’s Citi has the Balance Sheet to ride out the storm.

Buffett returns to deep value roots, adding Paramount and HP

Sticking with the cheap theme, Buffett put more than $4 billion in HP and $2.5 billion in Paramount (formerly branded as ViacomCBS). HP and Paramount are both trading at less than 6x EV/EBITDA while offering dividend yields of around 3%. At these levels, there is probably not much downside risk. HP has a cash cow in their printer business and the hybrid work from home/office trend should provide a tailwind for their PC unit. Paramount has launched its streaming service in a crowded marketplace, but its ownership of CBS, MTV, VH1, Nickelodeon, and extensive film library would be quite attractive to a potential acquirer in the event that the firm’s strategy is ineffective.

Buffett continues his big bet on Energy

Buffett continued to bet big on Energy. He more than tripled his position in Chevron, which is now valued at more than $25 billion, Berkshire’s 4th largest equity holding. He modestly increased his stake in Occidental Petroleum, which now stands at more than $12 billion. My assessment is that Buffett thinks the transition to a green economy will take longer than many suggest. He sees capacity constraints in the oil and gas sector. Hence, the supply-demand balance is in Energy’s favor for the long term. He also has a prescient lens into oil and gas shipments through Berkshire’s ownership in BNSF, America’s biggest participant in the crude-rail business.

Other new positions suggest Doomsday scenarios are unlikely

Other new positions included McKesson (a pharmaceutical distributor), Ally Financial (GM’s former auto financing arm), Celanese (a chemical firm), and Markel (a specialty insurance firm). Each of these names is selling at a steep discount to the S&P 500 with respect to most valuation metrics – quintessential value plays. Berkshire also increased its positions in GM and Restoration Hardware. These firms are cyclical businesses, with Buffett or his lieutenants betting that any economic downturn will be relatively transitory versus the doomsday scenarios that are currently permeating financial media headlines.

Buffett dumps Pharmaceutical stocks and Verizon

On the downside, Berkshire slashed by more than 80% its fairly recent positions in Verizon and Royalty Pharma and completely exited positions in AbbVie and Bristol Myers. Perhaps Buffett sees future pricing pressure on Pharma firms as one way of tackling our ever-present huge federal budget deficits. Explaining Berkshire’s virtual exit of its Verizon position is a bit more perplexing since the stock is still cheap at less than 10x earnings while boasting a dividend yield north of 5%. Maybe Buffett sees headwinds for the firm given the recently completed Sprint-T Mobile merger and AT&T’s renewed commitment to its telecom business.

In total, Berkshire’s new Form 13F revealed 8 new positions and an increase in 7 pre-existing positions. In contrast, Berkshire exited 3 positions and reduced stakes in 4 positions, resulting in the aforementioned net addition of $41.5 billion in 2022Q1.

Buffett still has the golden touch

Despite being nearly 92 years old and often derided for being out of touch with the times, Buffett keeps performing. Like in the "tortoise and the hare" fable, Buffett’s approach works over the long term. In a stock market grappling with a bear market and most diversified bond indexes experiencing double-digit losses, Berkshire is up more than 3% year to date. If you have the temperament to be a long-term investor in a short-term world and buy value, you usually come out on top.

John M. Longo, Ph.D., CFA

Director, WELREX?

Author of Buffett's Tips: A Guide to Financial Literacy and Life