Warren Buffett’s Berkshire Hathaway BRK.A BRK.B has released its 13F for the third quarter of 2024. The report indicates that Berkshire was a big seller of stocks last quarter―most notably, Bank of America BAC and Apple AAPL. In fact, Berkshire closed the third quarter with a record $325.2 billion in cash and cash equivalents, up from $276.9 billion at the end of June 2024.
Here’s a look at the stocks that the team bought and sold during the third quarter, a few undervalued Warren Buffett stocks to buy from Berkshire Hathaway’s portfolio today, and why Berkshire might’ve raised so much cash last quarter.
Warren Buffett and his team initiated positions in two new stocks last quarter: Domino’s Pizza DPZ and Pool POOL.
Domino’s Pizza is in some ways classic Buffett: It’s a wide-moat company with great capital allocators at the helm. According to Morningstar senior analyst Sean Dunlop, Domino’s boasts “economic returns supported by comparable sales growth in excess of peers, commanding franchise level profitability, and impressive international portability, underpinned by its ‘fortressing’ strategy and commitment to a lean, value-driven menu.” Morningstar forecasts average adjusted returns on invested capital (including goodwill) of 50% through 2033, which exceeds our weighted average cost of capital estimate of 6.9%, he adds. That being said, we think shares are worth $415 and appear fairly valued.
Pool is a midsize distributor of swimming pool supplies and related products. Morningstar analysts do not actively cover the stock, but it looks about fairly valued through the lens of our quantitative rating system.
Berkshire also added to its existing position in Heico HEI last quarter. Heico is an aerospace and defense supplier focusing on niche replacement parts for commercial aircraft and components for defense products. Morningstar assigns Heico a narrow economic moat rating thanks in part to switching costs stemming from the importance of its products operating correctly and their placement on long-cycle products, explains Morningstar analyst Nicolas Owens. We think the stock looks overvalued, as it trades 58% above our $173 fair value estimate.
Also last quarter, Liberty Media’s tracking stocks of Sirius XM Holdings merged with Sirius XM SIRI. Notably, Berkshire purchased additional shares of Sirius XM in October, which isn’t included in this 13F covering purchases and sales through Sept. 30. As of today, Berkshire owns approximately one third of Sirius XM’s outstanding stock.
Buffett hasn’t commented on the Sirius XM stake publicly as of this writing―so it remains a head-scratcher investment in the eyes of many Berkshire watchers. Sirius XM stock is down about 50% this year, but even so, Morningstar thinks the stock of this no-moat company is fairly valued. “In our view, Sirius XM is fighting an uphill battle as the technology that once gave it a unique offering and an advantage over competition is no longer a necessity to offer a subscription service in vehicles,” says Morningstar senior analyst Matthew Dolgin.
“We now see Sirius XM’s primary competition coming from streaming music providers that rely on internet connectivity rather than from terrestrial radio stations, and we believe those services provide the better value proposition for most consumers.”
Berkshire continued to peel back its position in Apple during the third quarter. “Apple was accounting for 40%-50% of Berkshire’s reported stock holdings before the end of 2023—so anything that lessens that concentrated of a position was not only good from a diversification perspective but also removes a decision for Greg Abel (and Ted Weschler and Todd Combs) down the road,” comments Morningstar strategist Greggory Warren. Another possible reason for reducing Berkshire’s exposure to Apple: China.
“There’s also that longer-term concern about China becoming more belligerent regionally, which would lead to Russian-like sanctions, especially if China was bold enough to invade Taiwan—which we think was the main reason Buffett bailed on Berkshire’s Taiwan Semiconductor TSM stake shortly after establishing it in the quarters preceding Russia’s invasion of Ukraine,” adds Morningstar’s Warren.
Berkshire also scaled back in several other names during the third quarter, including Capital One COF, Charter Communications CHTR, Nu Holdings NU, Ulta Beauty ULTA (in which it had just initiated a position during the second quarter), and longtime holding Bank of America. Of the latter, says Morningstar’s Warren, “It looks to be more profit taking similar to what we’ve seen with the Apple shares.”
The firm also completely sold out of its position in Floor & Decor FND.
Why is Berkshire Raising So Much Cash?
There’s been a good deal of speculation in the financial media about why Berkshire has been selling so much stock and fortifying its already immense cash position. In fact, Berkshire didn’t even repurchase its own shares during the third quarter—a first since the company started repurchasing shares on a more regular basis in the third quarter of 2018. Is Buffett preparing for a stock market correction? Is Berkshire getting ready to make an acquisition? How likely is this cash to be put to work soon?
“As to what this cash is being built up for, we doubt it is being done to fund some large acquisition, as we feel that Buffett is more concerned about his legacy now and doesn’t want his last big deal to be something that tarnishes his reputation,” says Morningstar’s Warren. “He seems to be quite pleased with the $12 billion Alleghany deal (completed in 2022), which made up for the bad taste in his mouth left over from the $32 billion Precision Castparts deal (done during 2015-16).”
He continues: “Our best guess is that Buffett is building up a large cash hoard that Greg Abel can tap into, once he departs the scene, to not only buy back a ton of stock, but potentially issue a special one-time dividend, to keep Class A shareholders engaged. In the interim, this cash could also be tapped to buy equities, once the market hits another correction phase.”
What about Berkshire not buying back its own shares during the third quarter? Morningstar’s Warren shrugs that off: “We were not too surprised, as the shares have hewed relatively close to our fair value estimate for much of the year and exceeded those levels in the third quarter.”
3 Cheap Warren Buffett Stocks to Consider
Most of the publicly traded stocks held by Berkshire Hathaway are fairly valued or overvalued today, according to Morningstar’s metrics. Here are three of the few stocks among its holdings that look undervalued according to Morningstar’s analysts.
1. Ally Financial ALLY
2. Kraft Heinz KHC
3. Verisign VRSN
Here’s a little bit about why we like each of these stocks at these prices, along with some key metrics for each. All data is as of Nov. 13, 2024.
Ally Financial
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Capital Allocation Rating: Standard
• Industry: Credit Services
Berkshire Hathaway owns more than 9% of Ally Financial’s stock. While Ally offers auto insurance, commercial lending, mortgage finance, and credit cards, auto loans remain its core focus and largest source of revenue. While a slower auto market and higher credit costs have weighed on recent results, we expect Ally to outperform its prepandemic returns, thanks to an improved funding structure and a shift away from dealer financing. The stock trades 20% below our $46 fair value estimate.
Here’s what Morningstar analyst Michael Miller had to say about the stock after the company’s third-quarter earnings release:
“No-moat-rated Ally Financial’s third-quarter earnings were weaker than they first appeared, as higher charge-offs and lower net interest income than we had anticipated were offset by tax benefits. Adjusted earnings per share increased from $0.83 last year but fell from $0.97 last quarter to $0.95. However, the company benefited from $179 million in electric vehicle tax credits, leaving it with a negative effective tax rate for the quarter. Ally passes on these tax credits to its customers in the form of lower lease rates. These tax credits have an accelerated positive impact on its bottom line that is then offset by a long-term headwind to the bank’s net interest margin.
“Inclusive of the tax credits, Ally’s third-quarter earnings translate to a return on equity of 11%. As we incorporate these results, we do not plan to materially alter our fair value estimate of $46. We see the shares as undervalued, though we concede that the firm will need to work through its credit issues in the near term.
“Ally’s net interest margin still faces some pressure from higher funding costs, although the Federal Reserve’s rate cut has alleviated this recently. The bank’s NIM fell to 3.22% from 3.24% last year and 3.27% last quarter, though this is still solidly above its first-quarter result. Additionally, the early recognition of the firm’s EV tax credit reduced its reported NIM in the quarter by 0.06%. In our view, the bank’s NIMs are still recovering from a trough, and we expect them to continue to climb over time. With the Federal Reserve beginning to cut rates, upward pressure on the bank’s funding costs has been removed, and the firm has been able to reduce deposit rates with minimal impact on flows. While the path will be bumpy, thanks to the bank’s interest-rate hedges, this should lead to an upward trend in its net interest income over time.”
Read Morningstar’s full report on Ally Financial.
Kraft Heinz
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Industry: Packaged Foods
Berkshire Hathaway owns more than 26% of Kraft Heinz’s stock. The packaged-food manufacturer has revamped its road map and is now focused on consistently driving profitable growth. We think Kraft Heinz stock is worth $56 per share, and shares are trading at a 43% discount to that fair value today.
Here’s what Morningstar director Erin Lash thinks of Kraft Heinz’s third-quarter results:
“Organic sales slumped 2.2%, as the combination of lower volumes and unfavorable mix (a 3.4% hit) was unable to offset higher prices (a 1.2% benefit) in the quarter.
“Why it matters: Macroeconomic headwinds are inciting consumers (particularly those on the low end) to increasingly seek out value. Encouragingly, we don’t think the firm is chasing short-term market share gains at the expense of investing for the long-term health of the business. Spending on technology, research and development, and marketing are up 18%, 16%, and 4%, respectively, year to date. While promotional frequency is higher than fiscal 2023, depth is essentially flat, and returns on this spending improved 6 percentage points. We attribute this to the integration of data and analytics, which we think stands to buoy the firm’s standing with retailers and consumers.
“The bottom line: Shares trade in the bargain bin, as the market seems to suspect volumes will remain in the doldrums amid tempered consumer spending and stepped-up competition after recent inflation-induced price hikes. However, we don’t believe this angst is well-founded, as the firm has abandoned past management’s directive to prioritize near-term profitability and cash flows in favor of prudently investing in its brands and capabilities to keep pace with evolving consumer trends.
“Between the lines: Rooting out inefficiencies should fuel brand spending. Since the start of fiscal 2023, Kraft Heinz has generated $1.1 billion in savings on its path to unearth $2.5 billion by the end of fiscal 2027. This contributed to a 30-basis-point gain in adjusted gross margins to 34.3%. Our forecast calls for the firm to expend around 6% of sales, or $1.8 billion, annually on research, development, and marketing (slightly above historic levels) and still direct 3%-4% of sales to capital expenditures annually through fiscal 2033.”
Read Morningstar’s full report on Kraft Heinz.
Verisign
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Software—Infrastructure
Berkshire Hathaway owns 13% of Verisign’s stock. We think Verisign has carved out a wide economic moat thanks to its monopoly position to register websites with dot-com and dot-net top-level domains with fixed pricing terms, explains Morningstar senior analyst Dan Romanoff. We assign Verisign a $195 fair value estimate, and shares are trading 5% below that.
Here’s Morningstar’s take on Verisign’s third-quarter results:
“We maintain our $195 fair value estimate for wide-moat Verisign following reasonable third-quarter results that marginally fell short of our top-line forecast but surpassed our profitability expectation. The .com and .net base continues to be hindered by soft demand in China and ongoing weakness from US registrars that have pivoted to raising retail prices and driving secondary market sales while pulling back on marketing spending for new customer growth. We have made minor tweaks to near-term assumptions to align with updated guidance, but they are immaterial to our valuation. At current prices, Verisign shares screen as fairly valued on a risk-adjusted basis.
“Third-quarter revenue increased 4%, as weak registration activity was offset by further realization of domain price increases. New .com and .net registrations declined to 9.3 million for the quarter relative to 9.9 million in the prior year, and the domain name base declined sequentially by 1.1 million to 169.6 million domains, largely due to weakness from US registrars. Despite demand headwinds and ongoing investments in marketing programs, Verisign expanded already sky-high operating margins by 130 basis points to 68.9% as domain pricing falls to the bottom line.
“For fiscal 2024, we continue to expect the domain name base to decline about 2.5%, in line with narrowed guidance. We assume the continued realization of domain price increases to drive 4% revenue growth and support operating margin expansion of 90 basis points year on year to 68%. We remain optimistic that investments in marketing programs will spur registration activity from 2025, but management flagged potential downside risk to the domain base depending on the level and speed of adoption by channel partners.”
Read Morningstar’s full report on Verisign.
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