Warren Buffett could have bought any of the 379 S&P 500 companies for nearly $78 billion. Instead, he piled it all into his favorite stock.

Few investors get as much attention on Wall Street as Berkshire Hathaway (BRK.A 0.14%) (BRK.B 0.68%) CEO Warren Buffett. This is because the Oracle of Omaha outperformed Wall Street’s benchmark index, the S&P 500often.

Since taking the reins at Berkshire in the mid-1960s, Buffett has overseen an aggregate return on his company’s Class A shares of more than 5,400,000%. By comparison, the S&P 500 has increased in value, including dividends, by about 37,000% over the same period.

Buffett’s well-publicized recipe for success has involved buying stakes in time-tested businesses that offer clear competitive advantages and strong management teams. Most importantly, he looks to the horizon when investing and tends to hold positions in the Berkshire Hathaway portfolio for years, if not decades, at a time.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

But the Oracle of Omaha is also a big believer in portfolio concentration. That means his best ideas are worth huge investment capital.

While mirroring Buffett’s investment work has been a winning strategy for decades, investors will have to do some unconventional research to find his favorite stocks to buy.

Warren Buffett was a very selective buyer of shares for almost two years

No later than 45 calendar days after the end of a quarter, institutional investors with at least $100 million in assets under management must file Form 13F with the Securities and Exchange Commission. A 13F provides an easy-to-understand snapshot of which stocks, industries, sectors and trends Wall Street’s top money managers bought and sold over the past quarter.

Warren Buffett’s 13Fs for the past seven quarters (Oct. 1, 2022 to June 30, 2024) show that he and his top investment aides, Ted Weschler and Todd Combs, have been endless sellers, with net sales of shares totaling nearly 132 billion dollars. With Berkshire’s boss sending in about $7.2 billion Bank of America stock on the July 17 chopping block, appears to be on pace for its eighth straight quarter of net equity sales.

However, the 13F forms revealed small pockets of selective buying activity. For example, Buffett can’t seem to get enough of the integrated energy company Occidental Petroleum (OXY 0.54%). Since the beginning of 2022, more than 255.2 million shares of Occidental have been purchased.

While a higher spot crude oil price tends to be great news for all drillers, Occidental is particularly drawn to its drilling segment. While its downstream chemical plants can somewhat hedge the decline in the spot oil price, it relies heavily on high oil prices to drive operating cash flow from its upstream drilling operations.

Buffett was also a willing buyer of the property and casualty insurer Chubb (CB 0.48%). Chubb is the company that was revealed in mid-May as the “confidential” stock in which Berkshire has built a position starting in the third quarter of 2023.

Although the insurance business tends to be boring, it is also very profitable. When catastrophic losses inevitably occur, insurers have a good reason to raise premiums for their customers. But even when payouts are low, insurers like Chubb maintain exceptional premium pricing power, given that claims and catastrophic events are normal long-term events.

Unfortunately, Berkshire Hathaway’s quarterly Form 13F fails to tell the whole story about Buffett’s favorite stocks to buy.

Image source: Getty Images.

The Oracle of Omaha has put nearly $78 billion to work in a stock near and dear to his heart

Despite owning $13 billion worth of Western stocks and approaching $8 billion in Chubb, neither of those stocks is Buffett’s most beloved holding.

This “preferred stock” is a company whose stock Oracle of Omaha has bought for 24 consecutive quarters (a six-year span) as of June 30, 2024, and in which it has invested nearly $78 billion of its company’s cash .

To demonstrate just how much conviction Buffett has in his favorite stocks, compare this nearly $78 billion investment to the 500 companies that comprise the S&P 500. As of the closing bell on September 13, 379 S&P 500 companies had a lower value. market cap than the amount of money Buffett has put to work in the stocks nearest and dearest to his heart over the past six years. In theory, Buffett could have bought Chipotle Mexican Grill, FedExor Aimbut chose to dump nearly $78 billion into one stock.

The twist is that Buffett’s favorite stocks to buy are… shares of his own company.

A 13F will not detail share repurchase activity. Rather, investors can typically find Berkshire Hathaway’s buyback activity highlighted just before the executive certifications page in each quarterly report.

Before July 2018, Buffett was only allowed to buy back shares if his company’s shares fell to or below 120% of their book value. Since the shares never fell below this threshold, no buybacks were made.

On July 17, 2018, Berkshire Hathaway’s board changed the rules governing buybacks to allow Buffett to work his magic. The new criterion states that buybacks can continue without an end date or cap as long as:

• Berkshire has at least $30 billion in cash, cash equivalents and U.S. Treasuries on its balance sheet; and
• Warren Buffett believes stocks are intrinsically cheap.

That second point is wide open to interpretation, leaving Buffett plenty of room to pull the trigger on buybacks whenever he sees fit. With Berkshire’s cash pile hitting an all-time high of $276.9 billion at the end of June, Buffett has more than enough firepower to keep buying back shares of his own company. The $345 million used in buybacks in the quarter ended June brought total buybacks since the July 2018 change to nearly $78 billion.

One of the key reasons the Oracle of Omaha is such a big fan of buybacks is that they encourage long-term investing by incrementally increasing the ownership stake of patient investors. As the number of outstanding shares decreases, each remaining share holds a larger fractional stake in the company.

Plus, buybacks have a way of making most time-tested businesses more attractive to investors. Businesses with constant or growing net income like Berkshire (without unrealized investment gains/losses) should see their earnings per share (EPS) expand over time as the company’s share count declines.

While Buffett may be bullish on Occidental Petroleum and Chubb, no other company can hold a candle to his most beloved stock, Berkshire Hathaway.