While there is much more to Warren Buffett's conglomerate Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) than mere stock-picking, Berkshire's public equity portfolio does get a lot of attention. That's not surprising, as Warren Buffett is widely regarded by many as the best stock-picker of all time.
Moreover, 2022's bear market may have refocused investors on value investing principles Buffett has espoused his entire life. That makes his moves amid the market chaos of 2022 all the more interesting.
After displaying lots of patience over the past few years, Buffett made five relatively big stock buys in 2022 as markets fell. Here are Buffett's picks and why he may have picked these names specifically.
Buffett bets big on oil and gas
Buffett was most active in the first quarter as the markets violently corrected due to inflation fears and Russia's invasion of Ukraine, the latter likely spurring Buffett to make tremendous bets on the oil sector, specifically in Chevron(NYSE: CVX) and Occidental Petroleum(NYSE: OXY).
Of course, one could say Buffett only increased his existing positions in both stocks. Berkshire already owned some Chevron stock and $10 billion in Occidental preferred stock, with warrants to purchase an extra 83.86 million shares.
However, the magnitude of the buying was enormous. Buffett more than quadrupled his Chevron stake, making it Berkshire's fourth-largest stock position, behind only Apple, Bank of America, and American Express -- and it overtook Amex later in the year. Occidental quickly became the eighth-largest, the sixth-largest if you include Berkshire's existing preferred stock.
The speed and magnitude of Buffett's buys, as well as the timing in the first quarter, likely mean the big bet on oil and gas had to do with Russia's invasion of Ukraine. Of course, the huge spike in oil prices following the invasion has since faded to the point that oil prices are now slightly negative for the year. That's thanks to the government's Strategic Petroleum Reserve releases and the Fed's aggressive interest rate hikes. Still, Buffett continued to add to these positions throughout the year.
The oil sector has consolidated greatly after a decade of low returns brought on by the supply increases from the shale revolution. Perhaps Buffett believes more measured supply growth going forward will keep prices high enough for long enough that the largest players could remain highly profitable for many years.
So, why Chevron and Occidental specifically? Well, Buffett was already familiar with these two companies and their management teams, and each company is large enough to move the needle for a portfolio as big as Berkshire's.
Both stocks are also relatively defensive in that they are diversified majors -- with conventional, deep-water, and shale exposure -- with oil and natural gas production assets, as well as midstream and downstream operations in chemical processing and refineries. In addition, both companies are investing in new low- and no-carbon technologies, including carbon capture.
While Buffett hasn't commented on these positions in much detail, he clearly likes management and has said he has a positive long-term outlook on oil and gas prices. With the start of the Ukraine war, Buffett may have concluded that Berkshire's diversified businesses lacked enough exposure to oil and gas prices, which have the ability to harm the economy -- and, therefore, the rest of Berkshire's portfolio -- should they move materially higher.
Both companies also have the means to invest in next-gen technologies like carbon capture, which could extend their longevity beyond the point that oil demand goes into long-term decline, whenever that is.
Merger arbitrage with Activision Blizzard
Also in the first quarter, Buffett greatly increased Berkshire's small nominal position in Activision Blizzard(NASDAQ: ATVI). Interestingly, Berkshire had already owned some Activision stock; yet, unlike Chevron or Occidental, one of Buffett's younger lieutenants, Todd Combs or Ted Wechsler, is likely who bought the initial stake in 2021.
However, in January, tech giant Microsoft offered to buy the video game studio for $95 per share, or $69 billion.
While Activision's stock jumped on the news, the stock never made it higher than the high-$70 to low-$80 range during the first quarter, about 20% under the acquisition price. That likely reflected skepticism over the deal closing, which is not unfounded. After all, just last week, the Federal Trade Commission sued to block the deal. Now the process will have to go through the courts, and the outcome is highly uncertain.
So, Buffett is playing merger arbitrage here, meaning investors buy an acquisition target trading below the acquisition price, hoping the deal will go through. Given the potential for 20% gains within a short time, that was undoubtedly attractive, especially in the context of a bear market.
The danger when playing merger arbitrage, obviously, is that if the deal doesn't go through, the target company's stock can fall significantly. Some call merger arbitrage the practice of "bending down to pick up a quarter in front of a bulldozer."
However, since Buffett's lieutenants already liked Activision enough to buy the stock last year, when the stock was in the mid-$60 range, Buffett likely thought the downside was manageable if the deal didn't go through. After all, if one of his younger proteges thought the stock was a good buy in the $60s, their estimate of intrinsic value was likely at least as high as Buffett's first-quarter purchase price in the high $70-$80 range.
Of note, Activision's all-time high in early 2021 was just above $104 -- above the acquisition price. In addition, if the deal is scrapped, Microsoft will have to pay Activision a $3 billion breakup fee -- about $3.83 per share.
Image source: The Motley Fool.
HP, Inc.
Rounding out Buffett's very active first quarter was a somewhat surprising purchase of PC and printer maker HP, Inc.(NYSE: HP), which became Berkshire's 12th-largest position in the first quarter. This pick was very interesting as Buffett has long stayed away from technology, and HP's stock is not exactly a Wall Street favorite.
While HP does have leading market share in the physical printing space, that appears to be an industry in a long, slow decline. HP also has strong market share in PCs, but this industry is also low-growth, at best. In fact, interest rates have risen, and consumers are pulling back on discretionary purchases, resulting in the PC sector experiencing its worst downturn in modern history, coming off the boom times of the pandemic.
It's likely Buffett's preference for low-priced value stocks that encouraged him to buy HP, combined with HP's ability to repurchase a lot of its shares. At the time of his purchase, HP was trading at just over six times earnings.
HPQ PE Ratio data by YCharts. PE ratio = price-to-earnings ratio.
Of note, HP has repurchased about $10.5 billion worth of its stock over just the past two years. For context, HP's entire market cap today is just $27.7 billion! The ability to retire such a meaningful amount of stock quickly was likely music to Buffett's ears.
However, Buffett likely didn't anticipate a PC downturn as bad as this, and HP's stock has declined since the purchase. Moreover, management recently said it would probably decrease share repurchases in the near term because it wants to keep its balance sheet healthy during this PC industry decline and potential recession.
Still, HP should continue generating solid free cash flow for years, even if its end markets are relatively low- or no-growth segments. The company just closed the $3.3 billion acquisition of Poly, giving HP some exposure to the higher-growth peripherals and hybrid work tools segment. So, the Poly buy may give HP's results an extra jolt going forward.
Growing net income isn't the only way to grow earnings per share (EPS); repurchasing stock at low valuations can also boost EPS if done in significant quantities. That's likely what Buffett saw in early 2022 -- even if the timing wasn't ideal.
Taiwan Semiconductor Manufacturing
Finally, perhaps the biggest surprise of the year was Buffett buying into the semiconductor space for the first time, buying up over $4 billion worth of key Apple supplier Taiwan Semiconductor Manufacturing Corporation(NYSE: TSM) in the third quarter. The big buy made this semiconductor foundry stock Berkshire's 10th-largest position.
While the TSMC purchase was surprising because Buffett had never bought a semiconductor stock before, it's also not that surprising, given TSMC's business qualities. TSMC is a dominant company that makes over half the world's chips, and its technology lead in manufacturing the world's most advanced nodes, with close to 90% market share, has catapulted it ahead of competitors.
The company has also demonstrated one of Buffett's favorite qualities of pricing power, as TSMC was able to raise prices to customers throughout 2022. TSMC has even been able to raise quotes on customers as powerful as Apple, for which TSMC makes the Bionic iPhone processor and Apple's M-series laptop processors. The ability to raise its prices with Apple, Buffett's biggest holding, likely got Buffett interested in this indispensable industry supplier.
TSMC fell along with the rest of the semiconductor sector this year and traded down to a very reasonable PE ratio in the mid-teens during Q3 when tensions between Taiwan and China came to a near-term head. Buffett likely saw this as a great price for a dominant manufacturer in the long-term growth industry of semiconductors and bought in.
Summing up Buffett's buys
Given the widespread fears that we are heading into a recession, one wouldn't necessarily think to buy into the energy and technology hardware sectors, each of which has proven to be quite cyclical. On the other hand, for those with a longer time horizon, which Buffett has, this may be the perfect time to buy into these sectors.
After all, the market is forward-looking, and recession fears have been present since the beginning of 2022. Since then, these companies have traded at very low valuations at various times throughout the year, likely factoring in an economic downturn, at least to some extent.
Ever the long-term oriented and price-conscious investor, Buffett's bets on oil and gas, video games, semiconductors, and PCs make much more sense when looking out past the next six to 12 months.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein has positions in Apple, Bank of America, Berkshire Hathaway, Microsoft, and Taiwan Semiconductor Manufacturing and has the following options: short January 2023 $210 calls on Apple. The Motley Fool has positions in and recommends Activision Blizzard, Apple, Berkshire Hathaway, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Bank of America and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
