With a brutal start to the year on the market and Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.25%) stocks outperforming on a relative basis, Warren Buffett has apparently shifted gears from buying Berkshire shares to buying shares of public equities, after a long dry spell. Berkshire spent $51.1 billion on U.S. stocks in the first quarter, compared to $9.7 in sales. And we also know that Berkshire continued to buy shares in April, buying an 11.5% stake HP Inc. (HPQ 2.32%)which needed to be disclosed.
We know that Buffett was buying a lot of oil stocks in the first quarter and in April, and there are indications that another $10 billion went to financial stocks and another $600 million to Apple. Buffett is also currently playing merger arbitrage, with a $5.6 billion bet that ActivisionBlizzard will soon be acquired by Microsoft.
Given the sell-off in tech stocks and consumer discretionary in the first quarter, these sectors could be next, with the next names potentially on Buffett’s buy list.
Alphabet (GOOG 0.83%) (GOOGL 0.64%) sold after the release of its first quarter results, but its numbers did not look bad at all. Although YouTube’s revenue fell short of expectations, search and cloud revenue both exceeded expectations. Search is Alphabet’s largest segment as the company’s primary profit center, while cloud computing is perhaps an underappreciated long-term opportunity. These two key activities therefore seem solid.
YouTube only accounts for about 10% of Alphabet’s revenue, and it’s feeling competitive pressure from TikTok, as well as tough comparisons to the last big pandemic-hit quarter. Alphabet’s stakes in its venture capital wing also had to be trimmed amid the sale, hurting bottom line more than its own operating profits.
Still, Alphabet’s search business has a very wide moat, and the company generates plenty of free cash flow. This is despite continued losses in the “other bets” segment, which includes long-term futuristic bets such as Waymo self-driving cars.
While other betting losses may discourage Buffett, Alphabet’s management has become more shareholder-friendly in recent years, steadily increasing share buybacks, which Buffett likes. As recently published, Alphabet just authorized a $70 billion buyout, up from last year’s $50 billion program and 2019’s $25 billion authorization. Meanwhile, Alphabet’s valuation has fallen back to just 21 times this year’s earnings estimates. That’s an even cheaper multiple than Alphabet had during the pandemic sale trough of 2020!
And Alphabet is even cheaper if you take into account its large cash position – around 10% of its market capitalization – as well as billions in ongoing cloud losses and other bets. Assuming these units have positive value, investors get the core of the digital ad business for a mid to high P/E multiple. Seems pretty cheap for a company like Alphabet. Buffett and his partner Charlie Munger have said in the past that they’ve “missed” buying Google, so today’s low price may prompt Buffett to finally buy stocks, even with the continuing losses in ” other bets”.
While Berkshire has generally avoided tech stocks in the past, Buffett and his managers Todd Combs and Ted Wechsler have made a few tech bets in recent years. Apple is now Berkshire’s biggest position, and we know someone from Berkshire bought a lot of HP stock in April.
If Berkshire likes low-value hardware maker HP, why not Dell? Both companies make similar products in desktops and PCs, and both are trading at discount valuations. In addition to PCs, desktops and peripherals, Dell (DELL 0.74%) also manufactures enterprise servers, while HP manufactures printers. Like HP, Dell trades at less than seven times earnings and recently implemented a dividend yielding more than 2.8%.
Unlike HP, Dell should benefit from its corporate exposure this year. Much of its IT segment is aimed at businesses rather than consumers. With business spending seemingly strong even as consumers retreat from low-end PC purchases, Dell’s financial results are expected to remain relatively resilient this year compared to other PC makers.
Dell is also leveraging its large size and presence in enterprise servers to develop hardware solutions in close partnership with major cloud providers, such as Snowflake (SNOW -0.75%). Dell and Snowflake, another Berkshire holding company, just announced a close partnership to make it easier to work with data stored in on-premises data centers on Dell servers with Snowflake’s cloud data lake. The two plan to integrate products and undertake joint marketing in the second half of this year.
While Dell may seem like a dinosaur and an uninspiring hardware maker to some, its size and execution allow it to benefit from increased digitalization across the enterprise. With a discounted valuation, I could see Buffett scooping up shares to round out HP’s stake.
This one cheats a bit, because Berkshire already owns $1.8 billion worth of HR (HR -0.89%) stock, formerly known as Restoration Hardware. It’s likely that one of Buffett’s other managers bought it, as the position is only 0.2% of Berkshire’s stock portfolio. won’t he buy more RH himself?
RH soared after Berkshire bought shares in 2019, but shares have since fallen more than 50% from their highs as the pandemic-era home furniture sales boom has slow motion. High inflation increases costs for HR and squeezes the consumer, which can dampen discretionary purchases of large durable goods. CEO Gary Friedman essentially said the same thing during the perilous last quarter earnings call.
However, Friedman is also turning RH into a luxury brand, selling fewer items at higher prices to wealthier people. A few years ago, the company began to close its small mall-like stores to open giant, multi-story design galleries with restaurants, cafes and full-service staff. The new strategy transforms its showrooms into museum-like venues, elevating RH’s furniture offerings to feel like works of art.
The strategy has been successful, with HR margins doubling over the past two years. In addition, RH is expanding its brand geographically in Europe this year and also opening RH-branded restaurants, hotels, homes, planes and charter yachts.
Trading at just 13.5 times this year’s earnings estimates, expectations now look rather low for RH. Yet luxury brands tend to trade at multiples higher than this, as they are generally insulated from economic cycles and have pricing power with their affluent clientele. However, given that RH is transitioning from a mass brand to a luxury brand, investors aren’t ready to give it full credit just yet.
If HR results remain resilient in a tougher economy, I could see Buffett considering this brand as a luxury complement to Berkshire’s low-cost furniture company, the Nebraska Furniture Mart.