New evidence strongly suggests that these are the “confidential stocks” that Warren Buffett bought

By | March 18, 2024

For almost 60 years Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has captured the attention of professional and retail investors by making many rounds on Wall Street. Since becoming CEO in the mid-1960s, he has delivered a total return of 4,938,103% on his company’s Class A shares (BRK.A) as of the closing bell on March 14. For comparison, this is 146 times greater than the total total return of the S&P500including dividends paid, over the same period.

While the affably named “Oracle of Omaha” may not always be right, his track record suggests he has a knack for finding value hidden in plain sight. That’s why investors are eagerly awaiting the Forms 13F that Berkshire Hathaway files with the Securities and Exchange Commission (SEC).

Berkshire Hathaway CEO Warren Buffett at Berkshire Hathaway's annual shareholder meeting.Berkshire Hathaway CEO Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

Warren Buffett, CEO of Berkshire Hathaway. Image source: The Motley Fool.

Berkshire Hathaway’s 13F is a powerful tool for investors

A 13F is a required filing every quarter for institutional money managers that oversee at least $100 million in assets under management. As of March 14, Buffett and his team had $366 billion in invested assets, spread across 45 stocks and two index funds.

What makes 13Fs valuable is that they allow investors to easily see what Wall Street’s smartest and most successful money managers have been buying, selling and holding. These documents can provide valuable insight into which stocks and trends are capturing the interest of Wall Street’s top investors.

For example, Berkshire Hathaway’s 13Fs showed that Warren Buffett and his investment assistants, Todd Combs and Ted Weschler, actively increased their positions in two energy stocks: Chevron (NYSE: CVX) And Western petroleum (NYSE:OXY). While energy stocks have not historically accounted for a significant percentage of Berkshire’s invested assets, the combination of Chevron and Occidental comprises nearly 10% of the aforementioned $366 billion portfolio.

That so much capital being deployed into two integrated oil and gas stocks sends a pretty clear message that Berkshire Hathaway’s brightest minds expect the spot price of oil to remain above historical norms, if not even higher. Years of underinvestment in capital during the COVID-19 pandemic have led to tight global oil supplies, pushing up the spot price of crude oil.

By being able to follow Warren Buffett’s investments, investors have been able to ride his coattails to potentially life-changing returns.

New clues are emerging about the ‘confidential stocks’ Warren Buffett is buying

However, Berkshire Hathaway’s 13F doesn’t tell the full story in more ways than one. In addition to Warren Buffett’s company having a $621 million “secret” portfolio, Berkshire Hathaway has also been granted confidentiality relief by the SEC regarding one or more of its holdings.

In other words, Buffett and his team are building a position in one or more companies, and they don’t want to let the cat out of the closet in the process. Because investors tend to pile into the stocks that Buffett and his aides buy, this confidential treatment allows Berkshire to build up its stake, presumably at a lower cost.

Berkshire’s last two quarterly 13Fs have come with this confidential treatment, meaning the Oracle of Omaha and his aides bought shares of a stock, or multiple stocks, from perhaps July through December. While I’ve previously thrown a dart at which mystery stock this could be, new clues point to a very specific company as Warren Buffett’s “confidential stocks.”

While there are literally thousands of publicly traded companies that Buffett could theoretically put his money into, three clues quickly narrow the field. First, we can examine how much Berkshire Hathaway spent on purchasing shares during the third and fourth quarters and compare this figure to the raw value of the shares purchased during those respective quarters, as reported in Berkshire’s 13Fs. In the second half of 2023, approximately $5 billion in stock purchases will be missing on a combined basis.

What’s interesting about this figure is that Berkshire Hathaway would be required to file with the SEC once the company reaches at least a 5% stake in a publicly traded company. Since there is currently no record, this suggests that the company that Buffett and his team are secretly buying has a market cap of $100 billion or more. That eliminates all but 120 publicly traded companies in the US

Second, Berkshire Hathaway’s fourth-quarter operating results show that the company’s cost base for “banking, insurance and finance” stocks increased by $2.38 billion to $27.14 billion from the quarter ended September. This cost base grew despite Buffett and Co. sold interests in insurers Markel Group And Globe life. This is something my Foolish colleague Adam Levy pointed out two weeks ago, and it all but ensures that Buffett’s confidential stock comes from the financial sector.

There are only 24 stocks with a market cap of $100 billion or more in the financial sector.

The third clue is that Warren Buffett likes a lot and will stubbornly sit on his hands until he gets one. This means that any share with a relatively high price-earnings ratio (P/E) is off the table. Setting the price/earnings limit to 15 reduces the number of candidates to just 13.

A person writing and circling the word A person writing and circling the word

Image source: Getty Images.

Here are the confidential stocks Berkshire Hathaway is likely to buy

Among the thirteen remaining financial stocks are a handful of companies that Berkshire already owns, including bank of America, American ExpressAnd Citi Groupas well as companies that have been sold in recent quarters or years, such as JPMorgan Chase, Goldman SachsAnd Wells Fargo. It’s highly unlikely that Buffett would re-enter JPMorgan Chase, Goldman Sachs, or Wells Fargo on a confidential basis, and we’d see buying activity through the 13F if it were the former three stocks that Berkshire currently owns.

That leaves seven possible choices:

Having followed Buffett’s trading activities for so long, I can’t recall a time when he showed much, if any, interest in Canadian banks. Moreover, while the Oracle of Omaha is willing to commit to a US land reclamation project (e.g. the Bank of America in 2011), European banks are not his thing. This likely eliminates HSBC, UBS, Toronto Dominion and Royal Bank of Canada from the discussion.

To take it a step further, Berkshire’s investment team just cleaned up its portfolio of Markel and Globe Life, meaning there’s probably no great desire to dive into an internationally-based insurer like Chubb.

This leaves two companies that fit what Warren Buffett is looking for: Morgan Stanley and Mitsubishi UFJ Financial Group, better known as “MUFG.”

Morgan Stanley cannot be ruled out as Berkshire’s potential ‘secret’ purchase. It is valued at twelve times full-year earnings and generates a substantial portion of revenue and profit from the company’s asset management division. In theory, asset management should help protect Morgan Stanley from inevitable downturns in the U.S. and global economies.

But the financial stocks that make the most sense for Buffett and his team to buy with confidence are MUFG.

In Warren Buffett’s recently published annual letter to shareholders, he described the small group of companies he values ​​as core holdings that will be held “indefinitely.” While Coca-Cola and American Express not surprisingly made the list, the Oracle of Omaha praised Occidental Petroleum and the five Japanese trading houses — Mitsubishi, Mitsui, Itochu, SumitomoAnd Marubeni – as companies he would never sell. In fact, Buffett has increased his company’s stake in each of these Japanese trading houses to about 9%. Berkshire’s investment team has made no secret of its belief that Japan’s economy can outperform in the long term.

MUFG is the largest bank in Japan by assets. More importantly, it trades at a reasonably low price-to-earnings ratio of less than 12, and the company is valued modestly below its reported book value. High quality banks trading below their book value have often been a draw that has attracted Buffett. By comparison, Morgan Stanley is valued at around 60% above its book value.

Moreover, MUFG has actually led Morgan Stanley to enormous profits since the financial crisis over fifteen years ago. Mitsubishi UFJ Financial Group bought $9 billion worth of preferred shares in Morgan Stanley after the bankruptcy of Lehman Brothers. This stake in Morgan Stanley has consistently generated between 30% and 40% of MUFG’s annual profits in recent years.

Why buy Morgan Stanley stock when Buffett can get exposure to Morgan Stanley at a fraction of the cost through Mitsubishi UFJ Financial Group? I am convinced that MUFG is the confidential stock that Warren Buffett is buying from Berkshire Hathaway.

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American Express, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and HSBC Holdings are advertising partners of The Ascent, a Motley Fool company. Sean Williams holds positions at Bank of America and Wells Fargo. The Motley Fool holds positions in and recommends Bank of America, Berkshire Hathaway, Chevron, Goldman Sachs Group, JPMorgan Chase, and Markel Group. The Motley Fool recommends HSBC Holdings and Occidental Petroleum. The Motley Fool has a disclosure policy.

New Clues Strongly Suggest These Are the ‘Confidential Stocks’ Warren Buffett Bought, originally published by The Motley Fool

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