Buffett Put $12 Billion On Stocks, But He Didn’t Buy Into This Market

February 21, 2017

Buffett Put $12 Billion On Stocks, But He Didn’t Buy Into This Market

  • Stocks grew on positive sentiment after Buffett disclosed his optimism and spent $12 billion.
  • His purchases included Apple, and an extremely cheap sector.
  • Passive investing without thinking is what allows for such heterogeneity in valuations. For investors like Buffett, it’s easy money.

Introduction

At the end of January, market bulls rejoiced when Warren Buffet disclosed in a Charlie Rose interview that he had bought $12 billion of stocks since Trump’s election. Since then, the market has jumped another 3% on positive sentiment as even the greatest low risk investors of them all is buying into this market.

A few days ago, however, Berkshire Hathaway disclosed—in their obligatory holding statement—what Buffett actually bought. This, of course, hasn’t been as publicized as has the fact that he bought $12 billion of stocks, but as always, journalists prefer to focus more on what’s sexy than on what’s important.

Let’s see if we can learn something from what the Oracle of Omaha has been buying in this market which is constantly breaching all-time highs.

Buffett’s Purchases

According to BRK’s 13-F quarterly holding statement, Buffett added stocks in the following companies: American Airlines (NASDAQ: AAL), Apple Inc. (NASDAQ: AAPL), Delta Air Lines (NYSE: DAL), Monsanto Company (NYSE: MON), Sirius XM Holdings (NASDAQ: SIRI), Southwest Airlines (NYSE: LUV), and United Continental Holdings (NYSE: UAL).

Buffett doubled his American Airlines stake last quarter at prices between $36.5 and $50. The price ranges for this and other purchases is the price range of the quarter as we can’t exactly know when Buffett made his purchases. The current price of AAL is $46.91, the PE ratio is 5.2, and the forward PE ratio is 9.7 (all data from Morningstar).

Buffett started buying Apple in Q1 2016 at prices below $100 and consistently increased his position throughout the year. AAPL quickly grew to BRK’s 7th largest position with the position at $6.6 billion at the end of 2016. AAPL’s current PE ratio is 16.2, but it was in between 11 and 15 when Buffett bought the majority of his stake.

Delta Air Lines is a relatively new investment for Buffett but is up to approximately 2% of his stock portfolio ($2.9 billion) with the majority of the stake bought in Q4 2016 at prices between $39 and $52. DAL’s PE ratio is currently 8.8, but Buffett bought it at even lower valuations.

Monsanto is an arbitrage play. Bayer AG agreed to acquire Monsanto for $12 billion per share in a cash deal. If the deal closes in 12 months, the return will be 17.4%, and this number will be even higher if the deal closes sooner. If the deal doesn’t close within 12 months, the most likely reason for that will be regulatory issues. The stock will suffer, but there are other suitors ready to jump in if necessary. This is a great example of Buffett’s low risk, good return way of parking $846 million for a while.

Sirius XM Holdings is a growth company and may be an investment made by one of Buffett’s managers, Todd Combs or Ted Weschler, as they are more apt to invest in media growth companies and the position is relatively small at $747 million.

The position in Southwest Airlines is currently at $2.1 billion, and the PE ratio is 16.1. United Continental Holdings is also at $2.1 billion, and the PE ratio is 9.6.

Conclusion

Buffett’s investment pattern is clear: he has been buying cheap stocks.

As he is a believer in the U.S. economy, he finds the valuations in the airline industry too cheap to miss out on, and he is happy to hold them forever at these valuations. PE ratios of 9.7, 8.8, 16.1, and 9.6 for AAL, DAL, LUV and UAL, respectively, are a bargain when compared to the S&P 500’s average PE ratio of 26.39. AAPL’s PE ratio of 16.1, or 11 when he started building his position, is 50% cheaper than the market, while Monsanto offers a 17% return. All of the above is much better than the 4% in earnings or 2% in dividends the S&P 500 offers.

You might ask how such low valuations are possible. Isn’t the market supposed to be efficient? Well, the answer lies in passive investing. Short term oriented investors buy and sell without thinking and when a sector enters negative sentiment, ETFs are forced to unload their investments at any price. In that way, amazing investment opportunities arise and Buffett sure knows how to take advantage of them.

On the disposal side, one of the largest disposals was Deere & Company (NYSE: DE) which is currently traded with a PE ratio of 22.3. Buffett built that stake in the period between 2012 and 2015 when the company was trading with a PE ratio of 10 to 14.

Investing is simple: your returns are perfectly correlated to the underlying business fundamentals (earnings) of your portfolio. Earnings growth is correlated to how the economy does, so you can easily estimate your long-term returns and the underlying risks by looking at what your stocks earn.

Buffett has a domestic bias because the 8,000 plus securities traded on the domestic market are enough for him to choose from and he had 54 years to diversify among temporarily cheap sectors. What you probably don’t have behind you is 54 years of diversification opportunities where you built a well-diversified portfolio throughout time. The fact that Buffet is diversifying into airlines now, after a career of more than 54 years, confirms that temporal diversification is an essential factor in portfolio returns.

In order to create a diversified portfolio without overpaying for stocks with crazy valuations, you should have a more global perspective than Buffett. Keep reading Investiv Daily as tomorrow we’ll discuss economies that are going to be the future global winners.

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