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2 Stocks Warren Buffett Is Likely Kicking Out of Berkshire Hathaway's Portfolio, and 2 Time-Tested Stocks He Can't Stop Buying

Motley Fool - Mon Apr 8, 4:21AM CDT

For nearly six decades, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has been crushing Wall Street's major stock indexes in the return column. Since the mid-1960s (when Buffett took over as Berkshire CEO), the broad-based S&P 500 has generated a total return, including dividends paid, of roughly 33,700%. Compare that to Berkshire Hathaway's Class A shares (BRK.A), which are higher by around 5,075,000% under the affably named "Oracle of Omaha."

Riding the Oracle's coattails has been a profitable venture for decades, and is made relatively easy thanks to Form 13F filings with the Securities and Exchange Commission. A 13F is a required quarterly filing for institutional investors with at least $100 million in assets under management that provides a detailed snapshot of what they've been buying, selling, and holding.

A pensive Warren Buffett surrounded by people at Berkshire Hathaway's annual shareholder meeting.

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

Between Berkshire's latest 13F and the company's annual earnings report, it's crystal clear that Warren Buffett is looking to kick two brand-name companies out of Berkshire Hathaway's $368 billion investment portfolio. At the same time, there are two time-tested companies the Oracle of Omaha simply can't stop buying.

Warren Buffett and his team are likely sending two brand-name companies to the chopping block

One of Buffett's key investing traits is that he tends to be predictable. When he believes a company is a value buy, he and his team will often build a stake in that company over multiple quarters and hang on to that position for years or decades to come.

The reverse is also true. When he and his investment aides, Ted Weschler and Todd Combs, have lost faith in a company, it's quickly pared down over the span of a few quarters. That's what we're witnessing right now with two stocks that look to be getting the heave-ho from Berkshire Hathaway's investment portfolio: Media stock Paramount Global(NASDAQ: PARA) and personal-computing (PC) and printing-solutions specialist HP(NYSE: HPQ).

The more than 30.4 million shares of Paramount Global Buffett's company dumped during the December-ended quarter is an undeniable clue that the remaining 63.3 million shares held will be gone at some point in the not-too-distant future.

Paramount's biggest issue, and the reason Berkshire's top investors likely want out, is the company's balance sheet. Paramount ended 2023 with $14.6 billion in long-term debt, compared to $2.46 billion in cash and cash equivalents. While it is generating positive cash flow, a rapid increase in interest rates, coupled with sizable losses from the company's burgeoning streaming segment, have created doubt about its ability to grow and/or service its debt.

It's also worth noting that the advertising market has been challenging. The expectation was that the U.S. economy would enter a recession in 2023. Though this didn't happen, businesses pared back their ad spending. Legacy TV operators like Paramount rely on advertising for a sizable percentage of their revenue.

Berkshire's 13F also shows that close to 79.7 million shares of HP were shown the door during the fourth quarter. Berkshire's HP position, which once stood at well over 100 million shares, has been whittled down to approximately 22.85 million shares, as of Dec. 31, 2023. Chances are that HP was completely disposed of during the first quarter.

Buffett's about-face on HP likely stems from the lack of a rebound in PC sales. Although PC sales jumped during the early stages of the COVID-19 pandemic when people were stuck in their homes, they've fallen off significantly since life returned to some semblance of normal and workers returned to the office. Without a clear floor in PC demand, HP's sales could decline for a second consecutive year.

Additionally, HP's profit has been driven almost entirely by modest cost-cutting and share repurchases. While an argument can be made that HP has a relatively safe floor at a little over 8 times forward-year earnings, the counter is that there are no clear catalysts beyond reducing costs and continuing to buy back stock. Buffett and his team may feel that Berkshire's cash is better served in short-term Treasury bills than by netting a relatively small yield with HP.

A stopwatch whose second hand has stopped above the phrase, Time to Buy.

Image source: Getty Images.

The two phenomenal stocks Warren Buffett can't stop buying

Although the Oracle of Omaha has been an undeniable net-seller of equities for five consecutive quarters (Oct. 1, 2022 through Dec. 31, 2023), he's been actively buying two time-tested stocks on a hand-over-fist basis.

The first value stock he and his team have added in two consecutive quarters is satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI). The roughly 30.56 million shares acquired in the December-ended quarter more than quadrupled Berkshire's stake in the company.

Sirius XM's obvious lure is that it's the only licensed satellite-radio operator. While the company still fights with terrestrial and online radio providers for listeners, its legal-monopoly status affords it strong subscription pricing power.

But the bigger differentiating factor can be seen in Sirius XM's revenue stream. Whereas online and terrestrial radio operators rely heavily on advertising for the lion's share of their revenue, only 20% of Sirius XM's sales were traced back to ads in 2023. The bulk of its sales (77%) originate from subscriptions. Since subscribers are less likely to cancel their service than businesses are to pare back their ad spending during periods of economic disruption, it suggests Sirius XM is better positioned to excel in any economic climate.

At 11 times forward-year earnings, Sirius XM stock has never been this cheap.

The other stock Warren Buffett can't stop buying isn't going to be found in a 13F. That's because the Oracle of Omaha's favorite stock to buy is shares of his own company. During Q4, Buffett green-lit the repurchase of $2.15 billion worth of Berkshire Class A and Class B (BRK.B) stock, and has overseen more than $74 billion in buybacks spanning 22 quarters.

The great thing about Berkshire Hathaway's share repurchase program is that there's no ceiling. When the company's board amended the criteria governing buybacks on July 17, 2018, it clarified that no cap existed as long as Berkshire had at least $30 billion in cash, cash equivalents, and marketable securities, and Buffett believed shares were intrinsically cheap.

Since Berkshire doesn't pay a dividend, share buybacks are the easiest way Buffett can reward investors who, like him, share a long-term vision. Repurchasing stock is slowly but steadily increasing the ownership stakes of longtime investors.

Additionally, companies like Berkshire Hathaway that have steady or growing net income enjoy a boost to their earnings per share (EPS) when their outstanding share count declines. A steady stream of buybacks is helping make Berkshire more attractive to value-seeking investors.

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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway and HP. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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