Berkshire Hathaway (BRK.A) (BRK.B) continued to add to its holdings in the three U.S. airlines that the firm bought stakes in during the third quarter, picking up an additional 54 million shares of Delta Air Lines (DAL) (for an estimated $2.4 billion), 24 million shares of United Continental Holdings (UAL) ($1.5 billion), and 24 million shares of American Airlines Group (AAL) ($1 billion) during the fourth quarter of 2016. The company also added a 43 million share stake in Southwest Airlines (LUV) ($1.9 billion) during the period, bringing the total amount of capital that Berkshire had invested in the major U.S. airlines to $9.3 billion (representing 6.3% of the insurers reported $148.0 billion in 13-F holdings) at the end of 201--a rather large bet on an industry that CEO Warren Buffett has eschewed for a long time.
Looking more closely at the other fourth-quarter purchases, Berkshire nearly quadrupled its stake in Apple (AAPL), picking up an additional 42 million shares for an estimated $4.8 billion (making it the insurer's seventh-largest holding--accounting for 4.5% of its equity portfolio--at the end of 2016). The company also put new money to work in Monsanto (MON) and Sirius XM Radio (SIRI), and made an incremental investment in Bank of New York Mellon (BK). All told, Berkshire spent an estimated $13.2 billion on stock purchases during the fourth quarter, funding about a third of that total with the proceeds of stock sales--including the elimination of stakes in Deere (DE), Verizon (VZ), and Kinder Morgan (KMI), and near elimination of the insurer's stake in Wal-Mart (WMT) (which, at less than 1.4 million shares, looks like the next candidate to be eliminated completely from the portfolio).
Even with these transactions, the makeup of Berkshire's top 5 stock holdings-- The Kraft Heinz (KHC) (19.2% of the firm's equity holdings), Wells Fargo (WFC) (17.9%), Coca-Cola (KO) (11.2%), IBM (IBM) (9.1%), and American Express (AXP) (7.6%)--remained the same.
Looking more closely at the purchases of the airlines, which we had originally assumed (back in November) were Todd Combs and Ted Weschler bets, and (as such) did not view them as long-term buy-and-hold stakes, Buffett has actually been out there more recently highlighting (and defending) the stakes (and even hinted in an interview with Charlie Rose that the decision was “in large part” his). As for the rationale behind buying the airlines, we were a bit shocked to see the transactions (especially of this magnitude), as Buffett has shunned the industry ever since his bad experience with his bet on US Airways back in 1989-95, calling the investment a mistake in almost every annual letter from 1989 to 1996. He also laid out an argument against investing in airlines again in Berkshire's 2007 annual letter.
So, what changed? From what we’ve seen and heard, it was Ted Weschler’s experience with American Airlines CEO Doug Parker (who Weschler was familiar with from his hedge fund days, where he benefited from the merger of US Airways and America West back in 2005). As the story goes, Parker had given a presentation at a conference about how the consolidation of the airline industry had ended the boom-and-bust cycle that had plagued it for decades—which sounds eerily similar to the rationale Buffett made for investing in the railroads nearly a decade ago (after eschewing that industry for years).
At that time, Berkshire bought stakes in several railroads-- Union Pacific (UNP), Burlington Northern Santa Fe, and Norfolk Southern (NSC) --before the insurer ultimately bought out BNSF (after which Berkshire unloaded the shares of the two other firms). That’s not to say the same thing will happen here (with Buffett even noting in the same Charlie Rose interview that the "railroads and airlines are not related. They’re different kinds of businesses."), it is just that the storyline looks vaguely familiar.
While the airlines grabbed all the headlines, we also saw another large move into an un-Buffett like stock in Apple during the fourth quarter. We don't want to say that the leopard has changed its spots, but a nearly $7 billion stake in another technology company (noting that Berkshire's stake in IBM was worth $13.4 billion at the end of the fourth quarter), represents an awful large bet (13.6% of the insurer's equity holdings) for a man who has traditionally avoided technology stocks.
While Buffett has tried to dispense with the notion that they don't invest in technology stocks because they can't understand the businesses or products, but rather because they "can't understand the predictability of the economics ten years hence" and, therefore, can't be certain where the "margin of safety" should be, we're not really sure that anything has changed on that front.
And when Buffett was asked n May 2012 why he had bought IBM and not Apple, he had replied that "the chances of being way wrong in IBM are probably less, at least for us, than the chances of being way wrong in Google or Apple…I just don’t know how to value them." One rationale could be that the size of Berkshire's equity portfolio limits the investable universe for the firm, and that with a market cap of more than $700 billion, Berkshire's stake is less than 1% of the total shares outstanding.
Another is that the firm fits a lot of the criteria that Buffett typically looks for--a well-known brand, strong cash flow generation, little-to-no debt, and an ability to pay a sustainable dividend and/or repurchase shares--and that the Oracle of Omaha is following the lead of one (or both) of his two lieutenants, providing them with additional input into and control over Berkshire's large equity investment portfolio.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.