How Is Warren Buffett Investing Now? - Financhill

How Is Warren Buffett Investing Now?

How Is Warren Buffett Investing Now? It seems unthinkable – has Buffett lost his “golden touch”?

But that’s exactly what was gleaned from the annual Berkshire Hathaway shareholders’ meeting this past May.

The assumption? That Buffett should’ve been buying when the rest of the market was in a panic this past March. After all, it was Buffett himself who coined the idea of being greedy when others are fearful and running for the exits.

But instead of being greedy, Buffett began selling, in fact, he completely got out of shares of airline stocks. He didn’t do much buying and instead held fast to his over $137 billion cash hoard – all while Berkshire Hathaway took a $50 billion hit for Q1 2020 (at least in terms of paper losses on his portfolio).

Critics of Buffett suggest that perhaps his age and that of Charles Munger, a longtime associate and partner, 90 and 96 respectively, are slowing down. That maybe they can’t wrap their heads around such quick stock market movements anymore. That maybe his tendency towards buying value has actually been behind the market for a long time and that his measured, unhurried style finally was catching up to him.

Is it true? We explore…

Warren Buffett’s Investment Philosophy

Much like Rocky Balboa, you can’t count Buffett out for long. He has certainly not been perfect (see IBM, Kraft and Occidental Petroleum as recent examples of mis-steps) but he has historically risen to the occasion when it counts the most. And when it really comes down to how to read the market, betting against Warren Buffett isn’t a wise decision.

Instead, investors’ wagers should be less focused on Berkshire Hathaway and more focused on Buffett’s overall investment philosophy.

Buffett has always bought with the idea that, if the market closed tomorrow and didn’t open again for five years, he (and Berkshire) would be fine.

In fact, he’s gone so far as to advise only buying shares you’d be satisfied with holding if the market suddenly closed up shop for 10 years. To understand this a bit more in-depth, take a look at stocks Buffett has recently bought and sold.

Buffett’s newest “buys” include:

Buffett’s latest “sells” include:

Buffett Is Selling Airlines

His latest sells also include all four major airlines. Some argue this was a panic decision by Buffett but remember he’s a long term investor and a deeper dive into the financials explains his quick decision.

First, all airlines are reliant on debt financing and government bailouts to stay alive. That’s a terrible proposition for existing shareholders who risk significant dilution.

Second and perhaps most scary of all is that consumer behavior may permanently change when it comes to travel. After all, who’s in a rush to jump on board a plane now?

Recent changes to flying means middle seats are no longer being filled, which should significantly hurt revenues for airlines.

With high fixed costs, greater debt, and lower revenues, the outlook for shareholders of airline stocks long-term is seriously concerning – short term bounces aside.

Warren Buffett Increases Stake in Sirius

Sirius undoubtedly has a monopoly, and Buffett loves companies whose profits are annually predictable.

Berkshire Hathaway held over 740,000 shares of Sirius at the end of 2019. In March 2020, Buffett upped the ante. The portfolio now owns over 130 million shares in Sirius XM Radio. Why the sudden splurge?

It’s no secret that stocks like Sirius were attractive to speculators and penny stock investors historically. All in all, this is a smart Buffett move. It also validates the success of the satellite radio giant. But what’s behind Buffett’s sudden urge to more heavily buy into this satellite radio conglomerate?

Cash flow

It’s not apparent if Buffett is a Howard Stern supporter – in fact, he may not even subscribe to any stations on the Sirius network.

What does matter and what is apparent, however, is Buffett’s knowledge of what works and what doesn’t. Warren Buffett just “gets” that big businesses generating big cash flow is simply a big “yes” when it comes to buying.

Sirius cash flow:

  • In 2015 – $1.32 billion
  • In 2016 – $1.51 billion
  • In 2017 – $1.56 billion
  • In 2018 – $1.52 billion
  • In 2019 – $1.64 billion
  • In 2020 – As of March 31, 2020, saw a decline to $354 million. As of date of press, Sirius free cash flow is estimated to again reach over $1.5 billion – and, according to analysts, that’s being conservative

Think turtles – slow and steady

While Sirius was considered a speculative stock in the past, it’s no longer fair – or accurate – to refer to the radio giant this way today. Its consistent profits throughout the years highlights steady top-line growth, and every year for the past five years has shown a revenue increase of 9-13%.

One of the things Buffett loves so much about companies like Sirius is that they’re both steady and profitable. They don’t bite off more than they can proverbially chew. They’ve become a well-oiled machine with faster growing net income than revenue for five out of the last six years.

Castles in the sky

Well, it’s not so much the castles that Buffett loves as it is the large protective moats that surround them.

It’s been over a decade since Sirius and XM Satellite Radio merged to create Sirius XM. The conglomerate is indisputably the king of premium music for radio. This protected “moat” is what calls Buffett – a company that seriously owns its niche.

Buffett Buys More Kroger

Even as the nation and the world face a pandemic, certain businesses have been deemed essential. Grocery stores for obvious reasons top the list.

This, you might think, would mean any grocery store would be an attractive investment – but Kroger comes out on top, at least for Buffett and his top generals at Berkshire – one of whom is reported to have led this investment decision.

But Kroger performs well in the market and they’re continuously improving operations. Buffett recently acquired a stake in the grocer totaling 2.3% ownership and at a fairly appealing valuation.

Maybe it’s not quite the deal Buffett is known for. However, Kroger’s currently considered a discount stock, as it continues to trade at 13 times its earning estimates and just a fraction of sales.

But what most investors are looking at are the headwinds competing stores are creating, both in-store and online. Will the future prove Buffett overpaid for his shares? Only time will tell. If competitors rise above Kroger’s current valuation, tomorrow’s investors may be able to purchase stock in the company for better prices than Buffett.

How is Buffett Investing Now – Summary

A keen investor knows what they own, why they made the buy, and what function the stock plays in the overall portfolio. Then, being realistic – rather than optimistic – in the outlook is important. But it’s perhaps never been quite as important as it is now.

Having a sound investment strategy never goes out of fashion. Whether Buffett will live long enough to see a return to his former glory remains to be seen, but it’s safe to say that investors will still take his advice, follow his lead, and profit well – even a hundred years from now.

The bottom line is he’s selling stocks with impaired capital structures and buying stocks with improving financials. Short term market movements may not reward him but the long term is very likely to lead to handsome returns.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.

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