Just in case you missed it, one of the most important data releases of the quarter occurred on Monday, May 15. Monday marked the deadline for money managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot that allows investors to easily determine what stocks Wall Street's top money managers bought and sold in the most recent quarter (in this instance, the first quarter).
After the closing bell on May 15, Berkshire Hathaway's (BRK.A -0.37%) (BRK.B -0.27%) 13F hit the newswires and showed an abundance of activity. There are three entirely new positions, four prior holdings that were completely sold, and quite a few adds and subtractions to existing holdings. Perhaps the most notable is what Warren Buffett and his investing lieutenants, Ted Weschler and Todd Combs, are doing with their FAANG stocks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett and his team are making moves among the FAANG stocks
When I say FAANG, I'm talking about:
- Facebook, which is now a subsidiary of Meta Platforms (META 0.08%)
- Apple (AAPL -1.90%)
- Amazon (AMZN -0.02%)
- Netflix (NFLX 1.88%)
- Google, which is now a subsidiary of Alphabet (GOOGL 0.01%) (GOOG 0.04%)
Including Warren Buffett's secret portfolio and Berkshire Hathaway's ownership stake in Markel, which owns a diversified array of securities, Buffett and his team directly or indirectly have exposure to all five FAANG stocks.
Generally speaking, that's not a bad thing. All five companies are industry leaders that have vastly outperformed the benchmark S&P 500 over the trailing-10-year period. Here's a look at each company:
- Meta lured 3.81 billion unique users to its popular social media platforms during the first quarter.
- Apple sports a mammoth share buyback program and is the runaway leader in U.S. smartphone market share.
- Amazon's online marketplace was expected to account for nearly 40% of U.S. online retail sales in 2022, according to a report from eMarketer.
- Netflix is the clear leader in U.S. and international streaming market share.
- Alphabet's internet search engine Google hasn't accounted for less than 90% of global monthly search share in over eight years.
Berkshire Hathaway's 13F shows that one of these FAANG stocks is being bought hand over fist, while another was modestly trimmed.
The FAANG stock Warren Buffett can't stop buying
If you've been following the Oracle of Omaha's buying activity over the past seven years, you're likely well aware of his affinity for tech stock Apple, which he summarized as "a better business than any we own" during his company's recent annual shareholder meeting. With feelings this strong about Apple, it should come as no shock that Buffett continued to be a buyer.
During the first quarter, Buffett and his team purchased more than 20.4 million shares of Apple. Excluding the shares owned by New England Asset Management (aka Buffett's secret portfolio), Berkshire's stake in the largest U.S. company by market cap is now north of 915 million shares.
The Oracle of Omaha loves Apple because it checks each and every box that matters to him and his investing lieutenants. It has an exceptionally strong and valuable brand, as well as a highly loyal customer base that regularly gobbles up new product releases. It's impossible to have a valuable brand without trust -- and it's quite clear that businesses and consumers trust Apple's products and management team.
That leads to the next point: Warren Buffett trusts Apple CEO Tim Cook and appreciates the direction in which he's taking the company. In particular, Cook is overseeing a steady transition that emphasizes subscription services. Although Apple isn't abandoning the products that allowed it to first resonate with consumers, it's evolving to include higher-margin revenue streams that'll further enhance customer loyalty and minimize the sales lumpiness associated with iPhone replacement cycles.
Another driving force behind Berkshire Hathaway's ever-growing stake in FAANG stock Apple is the company's aggressive capital-return program. Aside from having one of the largest nominal-dollar annual dividends on the planet, Apple has repurchased $586 billion of its common stock over the past 10 years. These buybacks are steadily increasing Berkshire Hathaway's ownership in Apple without Buffett and his team having to lift a finger.
However, I'd be remiss if I didn't also point out that Apple is historically pricey. After trading at a price-to-earnings ratio of 10 to 15 from 2013 through 2018, investors are now paying a multiple of 32 times earnings for a company expected to see its sales slide 11% in fiscal 2023 (Apple's fiscal year ends in late September). Apple doesn't exactly fit the mold of a stock the usually value-centric Warren Buffett would target.
Image source: Getty Images.
The one FAANG stock Buffett and his team are modestly selling
On the other side of the aisle, Warren Buffett and his lieutenants were modestly shrinking their existing stake in FAANG stock Amazon. A total of 115,000 shares were sold during the first quarter, which left Berkshire Hathaway with approximately 10.55 million remaining shares.
To be up front, there's a good chance it was either Ted Weschler or Todd Combs overseeing this selling activity. The Oracle of Omaha has gone on record as saying he wasn't responsible for his company initially buying shares of Amazon, and chances are he isn't all too familiar with the different facets of the company's operations. Nevertheless, any company in Berkshire Hathaway's portfolio is going to be dubbed a "Buffett stock."
Now for the all-important question: Why reduce Berkshire's stake in Amazon?
One possible reason could be the growing expectation that the U.S. will fall into a recession. Multiple indicators and metrics have suggested this is likely, and even the Federal Reserve has modeled a "mild recession" into its forecast for later this year. Since Amazon generates most of its revenue from its e-commerce marketplace, Buffett's investing lieutenants may be signaling the expectation of weaker online sales to come.
Valuation is another concern often brought up when discussing Amazon stock. During a bear market and/or recession, it's not uncommon for investors to go back to their roots and focus on traditional fundamental metrics. Those traditional metrics currently have Amazon at a trailing-12-month price-to-earnings ratio of 271 and roughly 71 times consensus earnings per share in 2023.
However, valuing Amazon traditionally has never made much sense. Since Amazon reinvests the bulk of its operating cash flow back into its logistics and other growth initiatives, cash flow tends to be the better measure of success. After closing out the entirety of the 2010s at a multiple of 23 to 37 times cash flow, shares of Amazon can be purchased for under 15 times estimated cash flow in 2023 and less than 10 times forecast cash flow for 2025. Shares are actually cheaper now than they've ever been, relative to Amazon's cash-flow potential.
What's more, cloud infrastructure service Amazon Web Services (AWS) is far more important to the company's profitability and cash flow than its e-commerce marketplace. AWS is No. 1 worldwide, with 32% of cloud infrastructure service spending, according to Canalys, and it regularly accounts for 50% to 100% of Amazon's quarterly operating income.
Frankly, Berkshire Hathaway reducing its stake in Amazon doesn't make a lot of sense.
