For nearly 60 years, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has captivated the attention of professional and retail investors by running circles around Wall Street many times over. Since becoming CEO in the mid-1960s, he's overseen an aggregate return of 4,938,103% in his company's Class A shares (BRK.A), as of the closing bell on March 14. For the sake of comparison, this is 146 times greater than the aggregate total return of the S&P 500, including dividends paid, over the same period.
Even though the affably named "Oracle of Omaha" won't be right all the time, his track record suggests he has a knack for finding value that's hiding in plain sight. That's why investors wait so anxiously for Berkshire Hathaway's Form 13F filings with the Securities and Exchange Commission (SEC).
Berkshire Hathaway CEO Warren Buffett. Images source: The Motley Fool.
Berkshire Hathaway's 13F is a powerful tool for investors
A 13F is a required filing each quarter for institutional money managers who are overseeing at least $100 million in assets under management. As of March 14, Buffett and his team had $366 billion of invested assets spread across 45 stocks and two index funds.
What makes 13Fs valuable is they allow investors to easily see what Wall Street's brightest and most successful money managers have been buying, selling, and holding. These filings can provide valuable insight into what stocks and trends are piquing the interest of Wall Street's top investors.
For example, Berkshire Hathaway's 13Fs have shown that Warren Buffett and his investing aides, Todd Combs and Ted Weschler, have been actively adding to their positions in two energy stocks: Chevron(NYSE: CVX) and Occidental Petroleum(NYSE: OXY). Though energy stocks have historically not accounted for a sizable percentage of Berkshire's invested assets, the combination of Chevron and Occidental comprise nearly 10% of the aforementioned $366 billion portfolio.
Having this much capital put to work in two integrated oil and gas stocks is a pretty clear message that Berkshire Hathaway's brightest minds expect the spot price of oil to remain above historic norms, if not head even higher. Years of capital underinvestment during the COVID-19 pandemic has led to tight global oil supply, which is helping to lift the spot price of crude.
Being able to track the investments Warren Buffett makes has allowed investors to ride his coattails to potentially life-changing returns.
New clues emerge about the "confidential stock" Warren Buffett is buying
However, Berkshire Hathaway's 13F isn't telling 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 an exemption by the SEC for confidential treatment 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 the cat to be let out of the bag while doing so. Since investors tend to pile into the stocks Buffett and his aides purchase, this confidential treatment allows Berkshire to, presumably, build its stake at a lower cost basis.
Berkshire's last two quarterly 13Fs have come with this confidential treatment disclosure, which means the Oracle of Omaha and his aides have been purchasing shares of a stock, or multiple stocks, from perhaps July through December. Though I've previously thrown a dart at which mystery stock this might be, new clues point to a very specific company as Warren Buffett's "confidential stock."
While there are genuinely thousands of publicly traded companies that Buffett could, in theory, be putting his money to work in, three clues quickly narrow down the field. First, we can examine how much Berkshire Hathaway spent purchasing equity securities during the third and fourth quarters and compare this figure to the rough value of the stocks purchased during those respective quarters, as listed in Berkshire's 13Fs. In the neighborhood of $5 billion in equity security purchases is unaccounted for on a combined basis over the second-half of 2023.
What's interesting about this figure is that Berkshire Hathaway would be required to file with the SEC once it's reached at least a 5% stake in a publicly traded company. Since there's currently no filing, it intimates that the company 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 U.S.
Secondly, Berkshire Hathaway's fourth-quarter operating results show that the company's cost basis for equity securities held in "banks, insurance, and finance" grew by $2.38 billion to $27.14 billion from the September-ended quarter. This cost basis grew despite Buffett and Co. selling stakes in insurersMarkel Group and Globe Life. This is something my Foolish colleague Adam Levy pointed out two weeks ago, and all but ensures that Buffett's confidential stock hails from the financial sector.
There are only 24 stocks with a $100 billion or greater market cap found in the financial sector.
The third clue is that Warren Buffett loves a good deal and will stubbornly sit on his hands until he gets one. This means any stock with a relatively high forward price-to-earnings (P/E) ratio is off the table. Setting the forward P/E cap at 15 reduces the number of candidates to just 13.
Image source: Getty Images.
Here's the confidential stock Berkshire Hathaway is likely buying
Among the 13 remaining financial stocks are a handful of companies Berkshire already owns, including Bank of America, American Express, and Citigroup, as well as companies that were sold within the past few quarters or years, such as JPMorgan Chase, Goldman Sachs, and Wells Fargo. It's highly unlikely Buffett would reenter JPMorgan Chase, Goldman Sachs, or Wells Fargo on a confidential basis, and we'd see buying activity via the 13F if it was the former three stocks Berkshire currently owns.
This leaves seven possible choices:
- Morgan Stanley(NYSE: MS)
- HSBC Holdings
- Royal Bank of Canada
- Mitsubishi UFJ Financial Group(NYSE: MUFG)
- Toronto Dominion Bank
- Chubb
- UBS Group
Having followed Buffett's trading activity for so long, I can't recall a time when he's shown much, if any, interest in Canadian banks. Furthermore, while the Oracle of Omaha is willing to go to bat for a reclamation project in the U.S. (e.g., Bank of America in 2011), European banks aren't his cup of tea. This likely eliminates HSBC, UBS, Toronto Dominion, and Royal Bank of Canada from the discussion.
To go one step further, Berkshire's investment team just purged its portfolio of Markel and Globe Life, meaning there's probably not a big desire to pile into an internationally based insurer like Chubb.
This leaves two companies that meet what Warren Buffett is looking for: Morgan Stanley and Mitsubishi UFJ Financial Group, which is better known as "MUFG."
Morgan Stanley can't be ruled out as Berkshire's potential "secret" buy. It's valued at 12 times forward-year earnings and generates a substantial portion of its sales and profits from the company's wealth management division. In theory, wealth management should help insulate Morgan Stanley from inevitable downturns in the U.S. and global economy.
But the financial stock that makes the most sense for Buffett and his team to confidentially buy is MUFG.
In Warren Buffett's recently released 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 unsurprisingly made the list, the Oracle of Omaha touted Occidental Petroleum and the five Japanese trading houses -- Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni -- as companies he'd never sell. In fact, Buffett has upped his company's stake to around 9% in each of these Japanese trading houses. Berkshire's investment team have not hidden their belief that Japan's economy can outperform over the long run.
MUFG is the largest bank by assets in Japan. More importantly, it's trading at a reasonably low forward P/E ratio of less than 12, and is valued modestly below its reported book value. High-quality banks trading below their book value have often been a lure that's attracted Buffett. Comparatively, Morgan Stanley is valued about 60% above its book value.
Furthermore, MUFG is actually riding Morgan Stanley's coattails to massive profits since the financial crisis more than 15 years ago. Mitsubishi UFJ Financial Group purchased $9 billion worth of preferred stock in Morgan Stanley following the collapse 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 via Mitsubishi UFJ Financial Group at a fraction of the cost? I strongly believe MUFG to be the confidential stock Warren Buffett is buying at 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 has positions in Bank of America and Wells Fargo. The Motley Fool has 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.
