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Warren Buffett’s Berkshire Hathaway (BRK.B) has released its 13F for the second quarter of 2024. The report indicates that Berkshire was a big seller of stocks last quarter―most notably, peeling back its massive stake in Apple (AAPL) stock by about half. In fact, Berkshire closed the second quarter with a record $276.9 billion in cash and cash equivalents, up from $189.0 billion at the end of March 2024.
Here’s a look at some of the stocks that Warren Buffett and his team bought and sold during the second quarter, as well as several of the most undervalued Buffett stocks to buy in Berkshire Hathaway’s portfolio today.
Despite being a net seller of stocks during the quarter, Berkshire initiated new positions in two companies: Ulta Beauty (ULTA) and Heico (HEI).
Ulta Beauty is the largest specialised beauty retailer in the United States. Morningstar thinks Ulta has carved out a narrow economic moat, based on the strength of its brand, explains Morningstar senior analyst David Swartz. We also think management has done an exceptional job of allocating capital and therefore award the company an Exemplary Morningstar Capital Allocation Rating. We assign Ulta stock a $405 fair value estimate, and as of this writing, shares are about 18% undervalued.
Heico is an aerospace and defense supplier focusing on niche replacement parts for commercial aircraft and components for defense products. Morningstar assigns Heico a narrow Morningstar Economic Moat Rating thanks in part to switching costs stemming from the importance of its products operating correctly and their placement on long-cycle products, explains Morningstar analyst Nicolas Owens. We think the stock looks overvalued, as it trades 36% above our $173 fair value estimate.
Berkshire Hathaway’s new 13F indicates that the company added to its existing stake in Occidental Petroleum (OXY) during the period; Berkshire owns nearly 29% of Oxy’s stock. The purchase isn’t surprising: Oxy’s stock was down 5% during the second quarter, giving Buffett an opportunity to accumulate more shares of one of Berkshire’s “Rip Van Winkle” investments that he expects to own indefinitely. Berkshire also added to its position in one-time “mystery stock” Chubb (CB) as well as to its stake in Sirius XM (SIRI) stock and Liberty Media’s tracking shares.
Even after peeling back its position in Apple, the stock remained Berkshire’s top holding at the end of June. Berkshire also scaled back in several other names during the second quarter, including Chevron (CVX), Capital One Financial (COF), T-Mobile US (TMUS), Louisiana-Pacific Corp (LPX), Liberty Media’s Liberty Live (LLYVA), and Floor & Decor (FND).
Berkshire eliminated its entire position in Paramount Global (PARA) during the second quarter; Buffett revealed this during Berkshire’s annual meeting in May. “After Buffett announced that Berkshire had eliminated the stake in Paramount, he admitted that ‘we sold it all, and we lost quite a bit of money, that happens in this business, too,’ and that he was ‘100% responsible’ for the Paramount decision – both buying in and getting out,” reported Morningstar strategist Greggory Warren shortly after the meeting.
“This was news to us, as we had assumed that the position, which had been built up since the start of 2022, was the purview of one of Berkshire’s two investment managers – Todd Combs and Ted Weschler (likely, in our view, the latter) – who mostly operate independently of Buffett.”
Berkshire also swept out its position in Snowflake (SNOW) – the provider of data lake, data warehousing, and data sharing solutions – during the second quarter.
Also of note, Berkshire sold 90 million shares of another top holding, Bank of America (BAC), in late July and early August, which isn’t included in this 13F, which only includes purchases and sales through June 30.
Why Did Warren Buffett Sell Apple Stock?
Buffett himself hasn’t commented on Berkshire’s second-quarter Apple stock sale, though he did suggest during Berkshire’s annual meeting that the company’s first-quarter sale of some Apple stock was tax-driven.
“Since the passage of the 2022 Inflation Reduction Act, Berkshire (which has a lot of deferred income taxes derived from its insurance investment portfolio and benefits from tax credits related to ongoing investments in renewables at Berkshire Hathaway Energy) has been exposed to the corporate Alternative Minimum Tax provision, given that it is a large corporation with average annual financial statement income (including unrealised gains and losses on its investment portfolio) exceeding $1 billion and tends not to always meet the threshold of paying more than 15% of pretax earnings as taxes over a rolling three-year tax period,” explains Morningstar’s Warren.
“By selling some of its stock portfolio holdings, and thereby realising gains on these investments, it can not only offset losses (like it experienced with Paramount Global this year) but increase the amount of taxes it is paying in any given year,” he continues. Morningstar’s Warren estimates that the Apple sales likely netted the firm some $70 billion-$75 billion in taxable gains and that the firm has increased its tax bill this year by at least $11 billion-$12 billion (assuming a 21% federal corporate tax rate) as a result.
The upshot: Buffett may just be getting ahead of a period where corporate tax rates might be higher than they are right now.
“Buffett noted during the annual meeting this year that ‘it doesn’t bother me in the least to write that cheque and I would really hope with all that America’s done for all of you, it shouldn’t bother you that we do it,'” reminds Morningstar’s Warren.
“Buffett went on further to highlight that ‘if I’m doing it at 21% this year [the current federal corporate tax rate] and we’re doing it a little higher percentage later on [assuming that the corporate tax rate goes up in the not so distant future], I don’t think you’ll actually mind the fact that we sold a little Apple this year.'”
Of course, taxes may not be the only reason for taking some chips off the table with Apple. Morningstar’s Warren notes that Apple had accounted for 45% of the company’s reported 13F holdings on average the past several years; perhaps the peel back was a derisking move, too. In addition, he points out that Berkshire has been a net seller of equities for seven straight quarters.
“It also doesn’t hurt that he could dump the proceeds from the sales into T-bills with 5% yields,” he adds.
3 Warren Buffett Stocks to Buy Now
Many of the publicly traded stocks held by Berkshire Hathaway are fairly valued or overvalued today, according to Morningstar’s metrics. Here are the three stocks among its holdings in the latest quarter that looked undervalued according to Morningstar’s analysts as of August 13 2024:
• Charter Communications (CHTR)
• Kraft Heinz (KHC)
• VeriSign (VRSN)
Here’s a little bit about why we like each of these stocks at these prices, along with some key metrics for each. All data is as of August 13 2024.
Charter Communications
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Industry: Telecom Services
Berkshire Hathaway owns about 2.7% of Charter Communications’ stock. The company is the result of a 2016 merger of three cable companies: legacy Charter, Time Warner Cable, and Bright House Networks. We think the company has carved out a narrow economic moat, thanks to its efficient scale and cost advantage. Charter Communications stock currently trades a whopping 27% below our $490 fair value estimate.
Here’s what Morningstar director Mike Hodel had to say about the stock after the company’s second-quarter earnings release:
While Charter isn’t in the clear, the second quarter provided some relief surrounding the Affordable Connectivity Program, which fully ended in June. Net broadband customer losses during the quarter weren’t wildly different than peer Comcast’s, which made far less use of the program. Charter also again delivered impressive profitability gains while generating solid cash flow. We maintain our $490 fair value estimate and still view the shares as undervalued.
Charter lost 149,000 net broadband customers, ending the quarter with 30.4 million. Management believes the end of the ACP caused at least 100,000 net losses, split evenly between disconnects (churn) and lower gross customer additions (the ACP stopped accepting new customers in February). Comcast posted a net loss of 120,000 customers during the quarter. However, Comcast had only accepted 1.4 million ACP customers, while Charter had brought on 5 million. Like Comcast, Charter indicated it has done well to move ACP customers to new plans but that the true test of the ACP’s impact will come later in the third quarter, as customers are unable to pay bills or choose to disconnect. Thus far, though, the impact has been modest, with June the strongest month for customer metrics during the second quarter and July similar to June.
Wireless customer additions also accelerated to 557,000 from 486,000 last quarter, and management indicated that only part of this improvement was the result of the free-line offer it made to customers leaving the ACP. Service revenue per wireless customer has increased for the first time since the launch of the Spectrum One promotion in late 2022.
Total revenue increased 0.2% on roughly flat residential revenue and accelerating commercial services growth. The EBITDA margin expanded 1 percentage point versus a year ago to top 40% for the first time.
Mike Hodel, Morningstar director
Review Morningstar’s company report about Charter Communications
Kraft Heinz
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Industry: Packaged Foods
Berkshire Hathaway owns more than 26% of Kraft Heinz’s stock. The packaged-foods manufacturer has revamped its road map and is now focused on consistently driving profitable growth. We think Kraft Heinz stock is worth $57 per share, and shares are trading at a 39% discount to that fair value today.
Here’s what Morningstar director Erin Lash thinks of Kraft Heinz’s second-quarter results:
The weakening consumer narrative percolated throughout narrow-moat Kraft Heinz’s second-quarter results. Organic sales slipped 2.4% on a more than 3% retraction in volumes. And management responded it intends to astutely promote to tighten price gaps in certain categories (estimated at 30%-40% of its US mix) to counter the tough consumer spending backdrop.
We expect these efforts will be funded through its productivity gains, which have until now manifested in improving profitability. In this context, adjusted gross margins edged up 210 basis points to 35.5%, with 190 basis points attributable to unlocked efficiencies. We don’t think Kraft Heinz will abandon this course, with the firm targeting $500 million in annual cost savings but doing so in a lasting manner (in contrast to its prior regime that sought to blindly root out costs).
Importantly, Kraft Heinz is unlikely to prioritise near-term volume and market share at the expense of the long-term health of the business, from where we sit, as the pains from doing so when the merger was inked have yet to fade. We posit the firm is judiciously fueling investments in research and development (up 13% in the quarter), marketing (9%), and technology (17%). We expect these efforts will persist; our forecast calls for it to direct more than 6% of sales each year to its brands and spend 3%-4% of sales to augment its fixed-asset base and digital prowess. And while these investments could dent profits from time to time, we see this as a prudent means to support its brand standing in the eyes of consumers and retailers.
With six months in the rearview, management moderated its organic sales forecast to flat to down 2%, from flat to up 2%, but still expects $3.01-$3.07 in adjusted earnings per share, which squares with our outlook. As such, we see little to warrant a change in our $57 fair value estimate, outside of time value. With the shares trading about 40% below our intrinsic valuation, we think shares are a bargain.
Erin Lash, Morningstar director
Review Morningstar’s company report for Kraft Heinz
VeriSign
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Software – Infrastructure
Berkshire Hathaway owns 13% of VeriSign’s stock. We think VeriSign has carved out a wide economic moat thanks to its monopoly position to register websites with dot-com and dot-net top-level domains with fixed pricing terms, explains Morningstar analyst Emma Williams. We assign VeriSign a $195 fair value estimate, and shares are trading 10% below that.
Here’s what Williams thinks of VeriSign’s second-quarter results:
Following second-quarter results, we lower our fair value estimate for wide-moat Verisign to $195 per share from $200 as domain registration headwinds persist longer than anticipated. The dot-com and dot-net domain base continues to be hindered by soft registration demand in China and lower demand from US registrars, who have pivoted to raising retail prices and pulling back on marketing to target new customer growth. Our updated valuation accounts for lower domain growth over the medium term and higher expenditure on marketing programs to propel domain registration growth back to positive territory by 2025.
Nevertheless, we believe the market has overreacted to near-term domain base pressure and overblown concerns regarding the upcoming dot-com contract renewal, providing investors with an attractive opportunity to gain exposure to a high-quality company.
The second-quarter top-line growth of 4% was marginally below our expectations as weak registration demand was offset by further realisation of domain price increases. New dot-com and dot-net registrations declined to 9.2 million relative to 10.2 million in the prior year, and the domain name base declined sequentially by 1.8 million domain names to 170.6 million at year-end. Despite demand headwinds, VeriSign continues to achieve improving profitability, with operating margins expanding an impressive 180 basis points to 68.7% as domain price increases fall to the bottom line.
For fiscal 2024, we assume the continued realisation of domain price increases to drive 5% revenue growth and support expansion of already sky-high operating margins to 67.7%, up 70 basis points year on year. We assume the domain name base declines 2.5% year on year from our prior forecast of negative 0.75% growth, which is at the midpoint of management’s updated guidance. We factor in a rebound in domain base growth from 2025 and low-single-digit growth on average over the coming decade, assuming gradual market share losses for dot-com and dot-net.
Emma Williams, Morningstar analyst
Review Morningstar’s company report for VeriSign
More About Warren Buffett Stock Picks
Warren Buffett has said that he doesn’t consider himself a stock-picker; instead, he’s a company-picker. That comment pretty much encapsulates how he thinks about stocks: They’re parts of businesses.
Learn more about how the Oracle of Omaha chooses companies to buy in How to Invest Like Warren Buffett. And read about his influence on how Morningstar evaluates companies and rates stocks in What We’ve Learned From Warren Buffett and Charlie Munger.
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