Skip to main content
  • Warren Buffett is a legendary stock picker.
  • He just bought three companies that generate significant cash flow.
  • Here's how you can approach buying these stocks too.

Warren Buffett's penchant for picking winners has made him one of the five wealthiest people in the world. His company, Berkshire Hathaway  (BRK.B) , manages hundreds of billions of dollars, yet despite its size, Berkshire's compound annual return has nearly doubled that of the S&P 500 since 1965. 

That's no easy feat!

Warren Buffett is usually tight-lipped about specific stocks he's buying or selling. After all, tipping your hand can be costly when managing as much money as he does. Moreover, amassing the number of shares he needs to own to move the needle takes time, so he doesn't want investors front-running his decisions.

Nevertheless, Berkshire Hathaway does put its cards on the table every quarter. Like every institutional investor, it files a 13-F report with the Securities and Exchange Commission disclosing what it owns.

Berkshire's latest 13-F report reveals its $363 billion (yes, "billion") portfolio comprises 52 stocks. He entered the quarter with nearly $147 billion in cash, and he exited the quarter with about $106 billion in cash, so Buffett – and his co-portfolio managers Todd Combs and Ted Weschler – were busy.

In addition to adding to existing positions, including an oil company that's become a top-five holding, they made a surprising bet on one of the world's biggest banks. They also bought one of the country's biggest drug distributors.

No. 1: Big oil gets bigger

COVID-era stimulus fueled significant GDP growth over the past two years, fueling energy prices, yet producers, including OPEC, have been hesitant to ramp production. As a result, the supply and demand imbalance has caused oil companies' profits to skyrocket.

Historically, the industry tripped over to take advantage of higher prices. However, E&P companies have taken a "once burned, twice shy" approach to supply this year, and the War in Ukraine has made Russian oil persona non grata, further tightening supply and propping up prices.

That's been a boon to Chevron  (CVX) . Its revenue surged 70% year-over-year to $54.4 billion, and earnings increased 261% to $3.25 per share in the first quarter. Yet, remarkably, that was the LOWEST growth reported by Chevron in the past year. Given the company's profitability, Buffett's interest isn't surprising.

In Q4, Berkshire owned about 38 million shares, but it exited Q1 holding a whopping 159 million shares worth over $27 billion. The increase last quarter makes Berkshire the second-largest owner of Chevron behind Vanguard, which owns it primarily because of index funds.

So far, Chevron is up 49% this year, while the S&P 500 is down about 15%. There could be more room to run if the Fed's inflation-busting rate increases don't decelerate economic growth too fast and producers stay vigilant, keeping oil prices high.

Chevron's after-tax earnings rise or fall substantially with every $1 change in Brent Crude and Henry Hub prices, so high prices have been very shareholder-friendly lately. 

Thanks to higher commodity prices, it plans to buy back $5 to $10 billion worth of shares this year, up from a previous target of $3 to $5 billion. Its dividend has doubled since 2010, and shares still yield 3.2% despite the rally in its share price. 

If Brent prices remain north of $75 through 2026, the company can generate enough free cash to conceivably retire over 25% of its shares outstanding, propping up earnings per share. And, management says it can cover its dividend as long as Brent Crude prices remain north of $50.

Technically speaking, Chevron's been building a base since early March, and it's threatening to break out to a new 52-week high. Relative strength is making new highs, and shares are trading above an up-trending 21-day and 50-day moving averages. In addition, on-balance volume is trending to new highs, and the MACD just signaled a new bullish crossover. In short, the stock still appears technically strong.

Shares aren't overly pricey, either. This year, earnings per share are expected to grow 92% year-over-year to $15.89, giving Chevron a P/E of 11, near the low-end of its 5-year P/E range. However, P/E ratios are usually lowest for cyclical stocks at the peak, not the bottom. In 2023, analysts think EPS will slip to $14.38, but estimates could get revised substantially higher or lower as the year progresses.

No 2: An incredibly inexpensive bank

Banks are considered bargains when their price to book value is below 1, and based on that metric, it's not hard to see why Warren Buffett likes Citigroup  (C) .

Citigroup's price to book ratio is 0.52 at the low end of its P/B range since the Great Recession. The ratio is also significantly lower than its peers, including Bank of America and JP Morgan, which boast P/B ratios of 1.18 and 1.37, respectively.

In "Berkshire and Buffett Rightly Put Their Value Stamp of Approval on Citigroup," Real Money's Brad Ginesin writes, "Since the 2009 government-assisted recovery from the financial meltdown in 2008, the shares of Citigroup have languished. Citigroup stock has been well-valued for years yet has frustrated various savvy value investors for a decade. The nod of approval from Berkshire could signal the shares are too cheap to ignore, and it's finally the right time to buy Citigroup."

In Q1, Berkshire finally sold out of embattled bank Wells Fargo, replacing it with Citigroup. Overall, Buffett bought 55 million Citigroup shares worth about $3 billion, making it Berkshire's 15th largest position.

Investors' disinterest in Citigroup may stem from lackluster management. However, the company installed a new CEO in February 2021 – Jane Fraser – and new leadership may help tilt the scales back in favor given the company's shareholder-friendly.

Back to Ginesin:

“It's easy to see what attracted Berkshire: Citi's low forward price-to-earnings (P/E) multiple of 7, valuation 45% below book, strong cash flow, $15 billion in earnings directed to its stock buyback program, and a generous 4.3% dividend yield. Citi returned $4 billion to shareholders in the first quarter by paying $1 billion in dividends and conducting $3 billion in share buybacks. Remarkably, at that buyback pace, Citigroup can reduce shares outstanding by more than 10% this year. In the past decade, Citigroup has reduced its shares outstanding from 3.03 billion in 2013 to 1.94 billion currently.”

Technically speaking, Citigroup put in a 52-week low on May 12 before rebounding 12% over the past three days. It's recovering its 21-day moving average on the post-Buffett news today, and it's trading just underneath resistance at its 50-day moving average. Those three moving averages are sloping downward, but the Moving Average Convergence/Divergence has turned positive.

Overall, Ginesen concludes, "Berkshire is the perfect investor to help the shares regain the Street's confidence and focus on its positive attributes and deep value. Buying shares around $50 delivers a solid yield and significant upside potential."

No. 3: A healthcare lynchpin

Healthcare demand is relatively inelastic to economic activity, and that could be one reason why Berkshire acquired 2.9 million shares of McKesson  (MCK)  last quarter, worth $894 million.

One of the largest distributors of medications, McKesson has seen sales benefit from rebounding doctor visits following COVID lockdowns and rapid growth in its prescription technology services business, which contracts with companies to improve prescription and adherence rates.

Until recently, an overhang had been uncertainty around ongoing opioid litigation. However, McKesson announced the approval of its opioid settlement covering 46 of 49 eligible states ($19.5 billion over 18 years) in February. That deal is now final, and settlements have been reached with two additional states, so the risk appears primarily behind it.

Like Chevron and Citigroup, McKesson produces a lot of cash that's being returned to shareholders. In fiscal '22, $3.8 billion of its $3.9 billion in free cash flow was used to reward investors, including $3.5 billion for buybacks. Since fiscal 2018, the company's returned $11 billion to shareholders through buybacks and dividends, and over that period, the total average shares outstanding has fallen nearly 31%. In addition, McKesson estimates it will buy back another $3.5 billion in stock this year.

Uncertainty over the company's plans to divest operations in Europe has been another overhang, but that's less of a mystery now too. So far, the company's inked deals to exit 10 of 12 countries it's leaving.

Its decision to exit Europe hurts revenue and profit in fiscal '23, but McKesson's guidance suggests it can make up most of the lost sales elsewhere. Management targets EPS of $22.90 to $23.60 on revenue growth that's essentially flat to up 4% this fiscal year. In 2024, analysts expect EPS to return to growth, improving by 10% as divestitures and lower COVID distribution sales slip into the rearview mirror.

So far this year, McKesson's been on a tear. It's up 62% since breaking out of a base last November. As a result, it's trading above the up-trending 21-day, 50-day, and 200-day moving averages. Additionally, its on-balance volume is trending higher, and its MACD is positive. Technically, this is another strong stock you can consider buying.

Overall, demand for prescription medicine should benefit sales and earnings because of aging demographics, and given uncertainty over its opioid settlement and overseas business exits is disappearing, McKesson could move higher, especially if investors embrace baskets that do best in a recession, including healthcare.

The Smart Play

Warren Buffett tends to hold positions longer than the typical institutional investor, but he tends to be more active in energy and healthcare stocks.

For example, he bought generic drug maker TEVA in 2018 and then began selling it in 2020 before exiting it in Q4. In 2020, he purchased AbbVie, Bristol Myers Squibb, Merck & Co., and Pfizer, and he doesn't own any of them anymore.

Similarly, he ratchets up and down his exposure to energy stocks. As you can see in the following chart, his exposure varies widely over the last 20 years, ranging anywhere from below 1% to his current 10% weighting.

CHART-Street-Smarts-0517

Because Buffett may not hold stocks in these baskets for long, you may want to approach them similarly. For example, you could buy Chevron and McKesson and then use a trailing stop loss to protect yourself. If you're a short-term trader, you could use the 21-day moving average as your line in the sand. Otherwise, you could set stop losses below recently significant levels. For instance, you could consider a stop loss on Chevron below $149 (slightly beneath the lows of its recent base). On McKesson, you could set it at $299.

On Citigroup, the current 0.80% weighting in Berkshire's portfolio may be too low. Warren Buffett has bet big on banks, and Citigroup is large enough to build a substantially more significant stake. Since Buffett may buy more shares, you may want to buy some too and add more if it breaks out above its 50-day moving average or retreats. 

  • Warren Buffett is a legendary stock picker.
  • He just bought three companies that generate significant cash flow.
  • Here's how you can approach buying these stocks too.

Warren Buffett's penchant for picking winners has made him one of the five wealthiest people in the world. His company, Berkshire Hathaway  (BRK.B) , manages hundreds of billions of dollars, yet despite its size, Berkshire's compound annual return has nearly doubled that of the S&P 500 since 1965. 

Member Exclusive

Get a daily dose of TheStreet’s smartest insights from its smartest analysts.

IRA-Account2

Does A Roth IRA Conversion Make Sense Now?

Falling stock prices may mean a smaller tax bill if you convert a traditional IRA to a Roth IRA this year.

Investors-Q3

Why You Ought To Be Patient in Q3

Poor performance could fuel redemptions, and the third quarter is usually tough in mid-term election years.

Sit-on-hands

Traders: Don’t Underestimate the Value of Sitting-on-Your-Hands

Patience could be the best strategy because stocks are entering a period of increased uncertainty.