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They’re saying Warren Buffett thinks stocks are overvalued. The talking heads are looking at his firm, Berkshire Hathaway‘s, $350bn cash position and wondering what it means. That cash pile has risen threefold since 2022. Has the ‘Oracle of Omaha’ seen danger in the markets?
What gets less attention is the stocks that it’s been buying. While those cash reserves have been growing, Buffett has still been scouting for bargains. Berkshire has opened positions in six stocks and enlarged holdings in four more. Here are the details of the moves he’s been making. And importantly for UK investors, what sectors he believes might thrive in the current environment.
The buys
The new stocks include healthcare group UnitedHealth, steel producer Nucor, homebuilders Lennar and DH Horton, security firm Allegion and advertising and billboard firm Lamar Advertising.
The enlarged positions include oil and gas company Chevron, alcohol beverage company Constellation, swimming pool supplies firm Pool and pizza giant Domino’s Pizza.
What’s the story here? In general terms, we’re looking at cheap stocks in defensive industries. While the world is getting worked up chasing gains in tech and artificial intelligence, Buffett is zigging while they zag. This is value investing 101.
Take oil major Chevron. Oil is an unfashionable investment these days because of the shift to green energy. But the products are massively useful, bring in many billions of sales, and the stocks trade cheaply. The Chevron price-to-earnings ratio is about a third lower than the S&P 500 average.
What about alcoholic drinks firm Constellation (maker of Modelo and Corona)? Alcohol has long been known as a defensive stock. During recessions or economic crises, folks don’t tend to give up the bottle. This could be a sign that Buffett wants some safety away from the artificial intelligence hysteria.
Similarities
Perhaps the most interesting takeaway for British investors is the similarity of these purchases to many UK companies. Shell (LSE: SHEL)), for example, is another oil giant like Chevron. Its P/E ratio is just 15 at present, a good way less than its American counterpart.
Oil stocks look cheap at the moment due to the shift towards renewable energy. But is the shift a touch overblown?
The late Charlie Munger, formerly Buffett’s right-hand man, said he expects oil will be “very precious stuff over the next 200 years”. Buffett himself said, “we’re gonna need a lot of hydrocarbons for a long time and we’re gonna be glad we’ve got ’em.”
Those two have been proven right many times on their way to becoming billionaires. Are they right on the decline of oil and gas too?
If they’re wrong, of course, then investing in oil could prove to be a bad move. Not to mention the ethical aspect of investing in a company that sells products that pollute.
And Shell has further challenges that similar American firms don’t. The recent discovery of a billion barrels of oil in the North Sea underscores this point. Our leaders aren’t declaring that we’ll “drill, baby, drill” and, at the time of writing this, it sounds like none of that oil will be extracted.
But for investors aware of the drawbacks, I think Shell is one to consider.
