Warren Buffett buys back shares. What this means for the stock market.

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Berkshire Hathaway CEO Warren Buffett has recently made big bets on Chevron and Occidental Petroleum, as well as other stocks.

Drew Angerer/Getty Images

Warren Buffett missed much of the post-Covid-19 selloff at the expense of


Berkshire Hathaway

shareholders. But in the first quarter of 2022, as stocks fell again, the Oracle of Omaha took action, buying some $51 billion in shares and selling less than $10 billion. These record quarterly purchases came as


S&P500

slipped 5% in the first three months of the year.

While Buffett’s move could prove profitable for Berkshire shareholders (ticker: BRK.A, BRK.B), the buys themselves aren’t much of a signal of an increasing uptrend in the market in his outfit. Instead, they are an application of Buffett’s style of value investing and his emphasis on simple, easy-to-understand theses about individual stocks.

Among Berkshire’s largest purchases in the first quarter were


Chevron

(CLC) and


western oil

(OXY). They are both big oil producers, with generous cash return plans. Buffett likes companies that buy back a lot of stock and pay big dividends. Share buybacks mean Berkshire’s stake will grow over time and dividends will send money back to the parent company to redeploy elsewhere.

“If you do it for the right price, there’s nothing better than buying back some of your own business,” Buffett said at Berkshire’s annual shareholder meeting on Saturday.

A surge in oil prices in the first quarter means plenty of earnings and free cash flow to fund those shareholder return programs at Chevron and Occidental. And both stocks have valuation multiples well below the S&P 500 average. The index is trading at around 18 times expected earnings for the year ahead. Chevron stock is worth less than 11 times and Occidental is worth only 7.5 times.

Energy buying didn’t even buck the trend in the first quarter: Chevron stock returned 40% including dividends, while Occidental jumped 96%. Berkshire probably bought $17 billion from Chevron and about $7 billion from Occidental during the period.

Another Berkshire mega-buy in the first quarter was the $11.6 billion deal to buy


Alleghenia

(Y). It is a horizontal acquisition in the insurance sector, with the property and casualty reinsurer slipping into Berkshire’s insurance operations. There’s no macro market betting there either.

Buffett revealed on Saturday that Berkshire had increased its stake in


ActivisionBlizzard

(ATVI) at about 9.5% since the start of 2022, suggesting purchases of about $4.5 billion this year. It’s hard to imagine the 91-year-old Buffett being a big fan of video games and, of course, Activision’s bet has nothing to do with the business – it’s a game of arbitrage of merger.


Microsoft

(MSFT) agreed to buy Activision for $95 per share, but shares have traded between $70 and $80 in recent months. Buffett expects the deal to close and that gap to close. Again, this is a simple, company-specific thesis.

Another big buy from Berkshire in the first quarter was


resume

(HPQ): an 11% stake worth approximately $4 billion. It’s another cheap stock – trading for about nine times forward earnings at the levels Buffett was buying at – with a big shareholder return program. The maker of personal computers and printers has a dividend yield of 2.7% and directs nearly all of its remaining free cash flow to share buybacks.

Berkshire’s other purchases in the quarter included $9.7 billion of financial stocks, where the company already has large stakes in banks, including


JPMorgan Chase

(JMP),


Goldman Sachs Group

(GS), and


Wells Fargo

(WFC). And Berkshire bought more


Apple

(AAPL), which is Berkshire’s largest holding. It doubles down on what Buffett already knows and loves.

Berkshire’s own shares rose 18% in the first quarter as the broader market fell and became more expensive in the process. As a result, CEO Buffett and his VP Charlie Munger have forgone share buybacks at the company, buying back $3.2 billion worth of Berkshire stock, up from $6.9 billion in the fourth quarter. and $27 billion for all of 2021.

All in all, the news that the legendary value investor spent $41 billion net buying stocks in the first quarter despite the market downturn sounds like a bullish signal. But the details of the moves are classic Buffett – and he’s never been one to make macro bets.

Write to Nicholas Jasinski at [email protected]

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