Many investors follow Warren Buffett’s moves more closely than those of any other investor. The CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is famous for its no-nonsense attitude towards investing and its emphasis on value. When making decisions about stocks, you can be sure that Buffett’s motivations never follow or jump into a popular trend. The Berkshire leader’s discipline is what has earned him such an impressive job record as an investor in his long career.
This past weekend, Berkshire Hathaway published its latest revenue report. Even though the company will not make its formal submission on its recent portfolio moves until later this week, the release of profits revealed that Buffett has a new stock among his favorites – and he increased purchases of that stock dramatically in the second quarter.
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Bets big on a Berkshire bounce
The forerunner that Warren Buffett has shown a new appetite for the last three months was Berkshire Hathaway himself. The insurance giant increased its spending on second-quarter stock purchases, conquering easy first-quarter repurchases and renewing investor confidence among Buffett’s views on his company’s prospects.
All in all, Berkshire spent more than $ 5.1 billion on purchases. Purchases of 1,822 Class A shares stood at $ 486.6 million, reaching an average price of just $ 267,000 each. Berkshire concentrated most of its buyback activity on Class B A shares, paying an average of $ 175.72 per share to repurchase more than 26.3 million shares and spend $ 4.63 billion in the process to give.
Buffett disrupted Berkshire’s repurchase activity in two periods. In May, the insurance company made the bulk of its purchases, benefiting from somewhat lower prices. Yet even as inventories rose slightly in June, Berkshire continued to hold on, with roughly $ 1.69 billion spent the month compared to $ 3.43 billion in purchases for May.
Which means bigger purchases
To put the buyback number in perspective, keep in mind that Berkshire bought only about $ 1.58 billion in shares in the first quarter. This was despite the fact that prices were much lower during the worst of the coronavirus market. Moreover, the timing of purchases in the first quarter was poor, as Buffett paid on average $ 215 per B share for the share he bought back from January to March.
However, the more important takeaway for investors from the rise in repurchase activity is that Berkshire and Buffett feel confident enough about the state of the company’s core insurance business to devote significant amounts of capital to buying Berkshire shares. During the May general meeting, Buffett seemed less than fully optimistic about the then current state of the insurance sector. This suggested to some that he believed Berkshire would need as much capital as it could get to survive the coronavirus crisis. Uncertainty about liability for insurance claims related to COVID-19 played an important role in that mutated optimism.
Despite having an enormous cash pile, more than $ 5 billion in purchases sends a clear signal that Omaha’s Oracle is comfortable using capital for purposes other than maintaining insurance loss reserves. With the stock bouncing back into the $ 210s for B shares, the purchases were also a good value for Berkshire – again showing Buffett’s impeccable timing in favor of opportunistic deals as they come.
Will there be more purchases?
With the recent rebound in Berkshire’s share price, the stock is now trading at a more typical price-to-book ratio of around 1.3. That is probably still within Buffett’s buying range, especially considering Berkshire’s buybacks from the first quarter. However, if the stock remains at these levels, it is less likely that Berkshire will spend as much in the third and fourth quarters as in the second.
Yet that should not disappoint Berkshire shareholders. For long-term investors who are confident in the success of the renowned value investor’s strategic vision, Warren Buffett will keep cash available for potential large company purchases likely to be even more lucrative than further purchases would be.
