- Warren Buffett is showing his openness to investments that stray from the Berkshire conglomerate's old economy core in order to adapt to the increasingly tech-driven economy.
- Berkshire's exposure to technology stocks has grown to 45% of its equity portfolio, thanks to its massive stake in Apple, worth more than $120 billion.
- The conglomerate has also dipped into IPOs and pre-IPO investments.
- Instead of deal-making, Berkshire has been focused on returning capital to shareholders.
Before turning 91 on Monday, Warren Buffett has been taking steps to make sure that Berkshire Hathaway — and his eventual successor — will be better positioned to benefit from a technology-driven economy.
The conglomerate's operating business is a patchwork of companies focused on the traditional backbone of the economy, from railroads, to batteries, insurance, home furnishing and retail. Because of the old economy orientation, Berkshire has missed out on the explosive growth seen in the Amazons of the world over the years. But the "Oracle of Omaha" is showing his openness to investments that stray from Berkshire's old economy core to adapt to the new world.
Berkshire's exposure to technology stocks has grown to 45% of its portfolio thanks to its massive stake in Apple, according to InsiderScore.com. Its Apple investment, first bought in 2016, has ballooned to over $120 billion to become its biggest equity holding by far. Ten years ago, Berkshire's top equity holdings showed very little tech exposure other than IBM.
To bet on growth, Berkshire has dipped into initial public offerings and pre-IPO investments, something the legendary investor once mocked. It's widely speculated that Buffett's investment lieutenants Todd Combs and Ted Weschler orchestrated these bets that break with Berkshire tradition.
"There has been a pretty significant shift in the investment portfolio. Now it's really geared towards the new economy," said James Shanahan, Berkshire analyst at Edward Jones. "He has given Todd Combs and Ted Weschler a lot more flexibility and opportunity to get their fingerprints on the business."
Berkshire invested in Brazilian fintech StoneCo within days of its IPO in 2018, and the stake has grown to more than $700 million thanks to a doubling in share price since the market debut. During that year, Berkshire also bought a stake in India's largest digital payments start-up, Paytm, which has filed for an IPO.
In the third quarter of 2020, the conglomerate bought $250 million worth of Snowflake stock at the IPO price and an additional 4.04 million shares from another stockholder at the debut price. In June 2021, Berkshire made a $500 million pre-IPO investment in the parent company of Nubank, a digital bank based in Brazil.
Buffett, the man who pioneered buy-and-hold investing, had been vocal about his distaste for buying companies around their market debut. Buffett previously compared buying hyped-up IPOs with trying to win lotteries, arguing they are not a sound basis for an investment. The last major IPO that Buffett bought before the recent spree was the Ford debut back in 1956.
"The equity portfolio today is more dynamic than it was 10 or 15 years ago with the Todds at the helm," said Cathy Seifert, Berkshire analyst at CFRA Research. "They will certainly dip their toe into the water and nibble at some new economy stocks. Unless you have some exposure to this, it's difficult to generate alpha, particularly due to the large-cap value-oriented bias they do tend to have."
While increasing its tech exposure to about 45%, Berkshire exited some of its big financial bets recently, including JPMorgan Chase, Wells Fargo and PNC Financial. The conglomerate still owns sizable stakes in American Express and Bank of America as of the end of June.
$100 billion question
For die-hard Buffett watchers, they have been asking the same question year after year — when is he going to finally pull off that "elephant-sized" acquisition? The answer might be disappointing to many, considering his disciplined value approach.
"I think what's kept him from doing anything too aggressively is that he almost doesn't want to have that last deal that he does — that he is going to be remembered for — be a disaster," said Greggory Warren, Berkshire analyst at Morningstar. "He doesn't want to hamstring the next guy running the show by acquiring something that maybe isn't going to help him."
At the end of June, Berkshire's cash pile stood at $144 billion, still near a record despite the company's massive buyback program.
For decades, companies used to throw themselves at Buffett, who was among the biggest whales with the most cash, along with private equity firms. As opposed to leveraged buyouts with quick turnovers though, Berkshire has always been a more permanent buyer that also gives companies the autonomy to run their business.
However, private equity has been on a tear in recent years with interest rates at record lows, and companies are also courted by a flood of new buyers from special purpose acquisition companies with possibly more attractive offers for going public.
Market valuations are near levels seen before the early 2000s dot-com bubble. Particularly, the utility and transmission segment that Berkshire wants to be a consolidator in has become very expensive as these stocks became the go-to names for yield-hungry investors, according to Morningstar's Warren.
"The fact that Berkshire hasn't done a blockbuster deal, I don't think investors are going to hold him to that," Seifert said. "I think they still trust his judgment and acumen particularly given where valuations are now."
Instead of deal-making, Berkshire has been focused on returning capital to shareholders. The company repurchased $6 billion of its own stock in the second quarter, bringing the six-month total to $12.6 billion. Berkshire bought a record $24.7 billion of its own stock last year.
"It's been a long time coming," Warren said. "The only alternative for them if they don't want the cash balance to keep growing is to continue to buy back stock. That's probably the best option for excess cash in the near term until we have some sort of correction in the market."
Thanks in part to the share repurchase, Berkshire's class B stock has quickly wiped out the pandemic damage and bounced back to an all-time high. Shares have rallied about 23% in 2021.
Buffett started a buyback program in 2011 and has long preferred buying other companies' stocks and businesses outright. In 1999 annual meeting, Buffett said he wouldn't buy back Berkshire shares unless they are "fairly dramatically underpriced."
In 2018, the company's board announced a removal on its buyback limit to allow purchasing whenever it believes that the price "is below Berkshire's intrinsic value."
"I think he's doing a good job of navigating and returning capital to shareholders. He understands that his legacy is going to be appraised not only on what he did the first 50 years but what he did the last five he's in charge," Warren said.
Enjoyed this article?
For exclusive stock picks, investment ideas and CNBC global livestream
Sign up for CNBC Pro
Start your free trial now