Follow the Money, Part I: Warren Buffett

6 New Stock Ideas from Q3 2020 13-F Filings

Today, I’m going to be starting a short mini-series on 13-F filings. What are 13-F filings? Every money manager with more than $100 million in assets under management (AUM) must file them within 45 days after each quarter.

For example, the company that I work for [1] manages nearly $2 billion. So for each quarter, we tell the SEC what we bought and sold. They make that data available to the public. The most recent quarter was 6/30/2020 to 9/30/2020, so any actions taken within that time period are disclosed within 45 calendar days (i.e.: this past Tuesday).

Why Do We Care?

Anyone who manages more than $100 million is (probably) intelligent and backed by a decent amount of research. By following what the “smart money” is doing, you can at minimum generate some new stock ideas for yourself. If you notice several big investors are doing the same thing, it’s a trend that you might do well to follow.

So today, I’m going to start by going over all the recent changes made by a few of the investors that I personally like to keep tabs on for new ideas.

First up, let’s look at Berkshire Hathaway – the holding company ran by (arguably) the greatest investor of all time: Warren Buffett. Buffett’s partner, Charlie Munger, is also involved in investment decisions as are Buffett’s two managing partners.

Why Are We Interested in Berkshire?

It’s obvious why we care what Berkshire is doing. Their performance has been astounding for the better part of 50 years. Buffett’s recent performance has not been as good (due to the large size of Berkshire), but he has still managed to beat the market by more than 5% per year since 1987. [2]

In the most recent quarter (ending 9/30), Berkshire made the following moves:

New Portfolio Positions

  • AbbVie (ABBV)

  • Merck (MRK)

  • Bristol-Myers Squibb (BMY)

  • Pfizer (PFE)

  • T-Mobile US

  • Snowflake (SNOW)

Sold Completely Out

  • Costco (COST)

Reduced Exposure to

  • Reduced JPMorganChase (JPM) holding by 95.6%

  • Reduced PNC Financial Services (PNC) holding by 64.12%

  • Reduced Wells Fargo & Co (WFC) holding by 46.38%

  • Reduced M&T Bank Corp (MTB) holding by 35.64%

  • Reduced Liberty Global by 6.73%

  • Reduced DaVita (DVA) by 5.25%

  • Reduced Apple (AAPL) by 3.7%

  • Reduced Axalta Coating Systems by 2.7%

Added to Existing Positions

  • +13.85% to the position in Kroger (KR)

  • +11.38% to the position in Liberty Latin America (LILAK)

  • +9.2% to the position in Bank of America (BAC)

  • +7.12% to General Motors (GM)

Observation #1: Bullish on Cloud-Based Software

Warren’s investment in cloud-based software company Snowflake (SNOW) was a big headline. Berkshire Hathaway invested half a billion dollars in the company at the IPO.

Warren Buffett buying IPOs doesn’t seem to go together. He’s historically been thought of as a value investor, however, that label is unfair. Buffett was once a “cigar butt” value investor; he bought those companies who were dying but had “one last puff” left in them. In later decades, his focus shifted to companies with large economic moats that could reinvest their capital at exceptionally high rates for many, many years to come. The kinds of businesses that future disruptors would have difficulty competing with.

Snowflake (SNOW) clearly fits the bill. They are uniquely positioned as a cloud-based database software company running the same architecture as Oracle (ORCL). They are essential to many companies’ technology infrastructure and have clearly developed an economic moat within the fast-growing cloud software space.

Buffett’s investment should be considered an endorsement of the cloud-based software space; however, it’s important to remember that there will be winners and losers from the technology boom. The majority of the profits (80%) will likely go to a small portion (20%) of the companies. Buffett is betting that Snowflake (SNOW) will be a part of the winning group.

Observation #2: Trouble Ahead for (Most) Banks

Buffett has long been a believer in bank stocks; however, we see this quarter that he reduced his stake by nearly 50% in long-time holding Wells Fargo (WFC) in addition to a nearly complete sale of JPMorganChase (JPM). Buffett also reduced exposure to PNC Financial Services (PNC) and M&T Bank (MTB), which are smaller regional banks.

Many have said Buffett is “giving up” on the banking sector, but that’s entirely the case. He increased his exposure to Bank of America (BAC) by 9.2%, which suggests there is something he likes about BAC more than the other banks.

Nevertheless, to see Buffett reduce exposure to the banking sector so dramatically is a clear warning signal that the long-term future may be dim for the industry as a whole. Of course, Buffett made the same bet on the airline sector a few months ago; so far, that appears to be incorrect. It’s still a bit troubling to see one of the greatest investors of all time and biggest believers in banks reduce his exposure so substantially – even after a significant drop in the prices of those stocks.

Observation #3: A Big Bet on Pharma

Buffett also initiated a new position in four (4) healthcare stocks: ABBV, MRK, BMY, and PFE. He’s clearly interested in the pharmaceutical space and for good reason. They may turn out to be the heroes in the fight against COVID-19, which should turn the public opinion (and, therefore, reduce political pressures) away from high drug prices. For the pharmaceutical industry, as a whole, to be thought of in a better light and seen a major benefit to society would be a huge win for them as a whole.

Buffett clearly thinks the same.

What Should You Do About These Stocks?

While Buffett is an extremely good investor, it’s unwise to follow him into every move. For one thing, he does make mistakes (see airlines in March 2020). Second, it’s important that you do the research for everything you buy. If you don’t, you set yourself up for failure when things start to go south (and they will at some point).

For example, let’s say that you were to initiate a position in all of the healthcare stocks, and then in 2021 there is some huge sweeping regulation on the pharmaceutical industry and all of those stocks plunge by 50%. What do you do then? My guess is that you would probably sell, particularly if you don’t know why you’re investing in them in the first place.

A far better alternative is to look into healthcare stocks and see what you think. What is your viewpoint? Do you like those same companies? If so, then you now have your own narrative and backing for why you should own them beyond just “because Warren does.”

On a Personal Note…

I must apologize for being so delayed in getting new content this week. We are remodeling our kitchen, so my non-work hours have been consumed by drywalling (I was up until midnight last night) and sparkling and priming and painting in preparation for new cabinets (coming Friday).

I appreciate you all so much for your support - especially those of you supporting me with the premium subscription. I hope to continue to provide way more than $5 per month in value to you. If you have any suggestions for future content or ways that I can improve, please let me know.

  1. Donaldson Capital Management is my employer, but the opinions expressed in this blog are my own.  ↩

  2. 14.9% annually vs. 9.4% for the S&P 500 (represented by VFINX) from Aug 31, 1987 through April 30, 2019. Source: MarketWatch  ↩