Why is Warren Buffett buying this fistful of stock splits?

Warren Buffett bought just seven stocks for Berkshire Hathawayhis portfolio in the second quarter of 2024. He seemed particularly excited about Sirius XM Holdings (SIR 3.87%)increasing Berkshire’s stake by 262%.

Rest assured that Sirius XM’s 1-for-10 reverse stock split earlier this month had nothing to do with Buffett buying more stock. The legendary investor would have liked the merger decision Liberty Mediahis holdings in the company with Sirius XM. However, he knows that a stock split in any shape, form or fashion changes nothing about the core business.

So why is Buffett buying this stock split? I think there are three main reasons.

1. Understand Sirius XM’s business

Buffett avoids investing in businesses he doesn’t understand. He missed out on huge gains in several of today’s top tech stocks because their business models weren’t in the wheelhouse. Still, Buffett undoubtedly understands Sirius XM’s business.

He is said to be a fan of Sirius XM’s satellite radio. Buffett is said to be particularly fond of the “Siriusly Sinatra” channel which plays the music of Frank Sinatra along with other similar singers including Tony Bennett and Dean Martin.

While Sirius XM’s business is not the same as that of a newspaper, there are some distinct similarities — including the fact that both rely on subscriptions for revenue. As a former paper boy, Buffett certainly knows how subscription models work.

Also, Buffett has always valued companies with dominant market positions. Sirius XM has a monopoly on satellite radio in the US and is a major player in the podcast market.

2. He views management favorably

Many know that Buffett once said, “Our preferred holding period is forever.” What I often miss, though, is that he prefaces this remark by saying that it applies “when we own parts of outstanding businesses with outstanding management.” I suspect that a key reason why Buffett has invested so heavily in Sirius XM is that he views its management favorably.

Sirius XM CEO Jennifer Witz joined the company in 2002. She has held several financial and operational positions, including chief marketing officer from August 2017 to March 2019 and president of sales, marketing and operations from March 2019 to December 2020. Witz moved into the general manager. in January 2021. Prior to working at Sirius XM, she held executive positions at Viacom (now part of Paramount Global) and Metro-Goldwyn-Mayer (now owned by Amazon).

The important thing is that he has a lot of skin in the game. Witz owns nearly 12.1 million shares of Sirius XM.

3. He thinks the price is right

Buffett learned from Benjamin Graham, the “father of value investing.” He remains a value investor at heart, despite drifting somewhat away from Graham’s philosophy over time. Buffett would never buy a stock if he didn’t think its valuation was attractive. He undoubtedly thinks the price is right with Sirius XM.

The numbers back it up. Sirius XM trades at a forward price-to-earnings ratio of 6.4, making it one of the cheapest stocks in Berkshire Hathaway’s portfolio.

In 2013, Buffett wrote to Berkshire Hathaway shareholders, saying his first step in evaluating whether to buy a stock is to “decide whether we can reasonably estimate an earnings range for five years or more.” If the answer is yes, he will only buy the stock if its price is attractive relative to the lower end of his expected earnings range.

This approach has much in common with a valuation measure popularized by Peter Lynch — the price-earnings-growth (PEG) ratio. Lynch argued that a stock with a PEG ratio of less than 1.0 was attractively valued. Sirius XM’s PEG ratio is 0.64, according to data from LSEG.

Did Buffett Look at Sirius XM’s Low PEG Ratio Before Buying the Stock? Probably not. However, I suspect his analysis showed that the company’s price is attractive given its earnings growth.