Warren Buffett’s secret portfolio contains 90 securities — five of which are phenomenal businesses whose shares were purchased in the March-ended quarter.
For almost six full decades, Berkshire Hathaway (BRK.A 0.58%) (BRK.B 0.38%) CEO Warren Buffett has been running circles around Wall Street’s benchmark index, the S&P 500. Whereas the S&P 500 has been nearing a 35,000% aggregate gain, including dividends paid, since the mid-1960s, Berkshire Hathaway’s Class A shares (BRK.A) have produced an aggregate gain of greater than 5,060,000% without a single dividend payment over the same span.
Given the Oracle of Omaha’s penchant for outperforming Wall Street’s major stock indexes, it’s not a surprise that investors eagerly await the quarterly release of Berkshire Hathaway’s Form 13F filing with the Securities and Exchange Commission.
A 13F is a required filing for institutions with at least $100 million in assets under management (AUM). It allows investors to see what Wall Street’s top money managers bought and sold in the latest quarter. May 15 marked the filing deadline for the March-ended quarter.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Did you know Warren Buffett has a “secret” portfolio?
While Berkshire Hathaway’s 13Fs often provide a solid overview of what stocks, industries, and trends are piquing the interest of Warren Buffett and his top investment aides, Ted Weschler and Todd Combs, these filings don’t tell the complete story.
In 1998, Berkshire acquired General Re in a $22 billion deal. Although the prize of this purchase was General Re’s reinsurance operations, General Re also owned a specialty investment company — New England Asset Management (NEAM). When Buffett’s company closed the deal 26 years ago, it became the new owner of NEAM.
NEAM ended the March quarter with roughly $646 million in AUM, which means it’s required to file a 13F like every other institutional investor. Although Warren Buffett doesn’t oversee NEAM’s investments in the same way he manages Berkshire Hathaway’s $380 billion portfolio, the 90 securities held in NEAM’s portfolio are, ultimately, owned by Berkshire Hathaway. Thanks to an acquisition 26 years ago, Warren Buffett has a $646 million “secret” portfolio.
While an assortment of exchange-traded funds make up the largest positions in Buffett’s secret portfolio, there are also dozens of brand-name companies held by NEAM. During the first quarter, the following five magnificent stocks were added to this hidden portfolio.
AT&T and Verizon Communications
Though Warren Buffett has mostly shied away from legacy telecom companies in recent years, NEAM’s 13F shows that 22,235 shares of AT&T (T 0.17%) and 14,175 shares of Verizon Communications (VZ 0.79%) were purchased in the quarter ended in March. I’m lumping these two companies together because they share many of the same catalysts and headwinds.
Legacy telecom providers like AT&T and Verizon have vastly underperformed in the current bull market due to rapidly rising interest rates (which could make future refinancing and deal-making costlier) and a report from The Wall Street Journal (WSJ) last year that highlighted the potential dangers of lead-sheathed cables. The WSJ report suggests legacy operators like AT&T and Verizon could face hefty clean-up costs and health-related liabilities because of their lead-clad cables.
The good news for AT&T and Verizon is that any potential liability claims would likely be decided in the U.S. court system, which is notoriously slow.
Further, AT&T has made substantial headway in reducing its net debt following the divestment of content arm WarnerMedia in April 2022. Over the past two years, AT&T’s net debt has declined by a shade over $40 billion to $128.7 billion. Verizon, on the other hand, has yet to make meaningful progress reducing its outstanding debt.
AT&T and Verizon are also benefiting from the 5G revolution. Upgrading their networks to support 5G speeds has led to increased data consumption from their respective wireless customers and a sustained uptick in net broadband additions. Verizon added 389,000 net broadband customers in the first quarter, while AT&T has picked up at least 1 million net broadband customers for six consecutive years.
Image source: Getty Images.
Johnson & Johnson
Another magnificent stock being added to Warren Buffett’s secret portfolio — 2,225 shares purchased in the March-ended quarter — is healthcare conglomerate Johnson & Johnson (JNJ -1.82%). J&J, as Johnson & Johnson is more commonly known, was once one of Berkshire’s largest holdings. However, Buffett soured on the company after it committed the cardinal sin of using its own stock as some of the collateral to facilitate the acquisition of medical-device company Synthes in 2012.
Similar to AT&T and Verizon, J&J’s stock has underperformed since the current bull market took shape. This can be attributed to the legal overhang J&J is dealing with regarding its now-discontinued talcum-based baby powder. Roughly 100,000 lawsuits allege J&J’s baby powder causes cancer. Previous efforts by the company to settle this litigation have been unsuccessful.
But J&J possesses something only one other publicly traded company has: the highest-possible credit rating (AAA) from Standard & Poor’s (S&P). S&P has the utmost confidence that J&J can service its debts and use its cash and/or operating cash flow to cover any settlement expenses.
Additionally, J&J continues to benefit from its shift to focusing on novel drug development. Brand-name therapies enjoy strong pricing power and have really juiced up J&J’s margins.
Wells Fargo
A fourth stellar stock that was purchased for Warren Buffett’s hidden portfolio during the first quarter — 6,830 shares were added — is money-center bank Wells Fargo (WFC 0.89%). Like Johnson & Johnson, Wells Fargo was once a top holding for Berkshire Hathaway. Unfortunately, an unauthorized account scandal hurt trust in the company, which ultimately compelled the Oracle of Omaha to head for the exit as well.
The promise and peril of bank stocks is that they’re cyclical. Though select indicators suggest a recession could be on the horizon, such as the first notable decline in U.S. M2 money supply since the Great Depression, periods of economic expansion handily outlast downturns. Disproportionately long periods of growth allow bank stocks like Wells Fargo to steadily grow their loan portfolios over time.
Furthermore, big banks like Wells Fargo are also benefiting from the fastest rate-hiking cycle in four decades. Higher lending rates have allowed banks with outstanding variable-rate loans to reap the rewards of added net interest income each quarter. With core inflation remaining stubbornly high, the Fed isn’t in any hurry to lower rates.
Another longtime advantage for Wells Fargo has been its ability to attract well-to-do clientele. Banking customers with higher incomes are less likely to alter their spending habits during economic downturns. This puts Wells Fargo in a better position to navigate challenging economic climates.
Chevron
The fifth magnificent stock being bought for Warren Buffett’s $646 million secret portfolio is none other than energy titan Chevron (CVX 0.52%). Although Berkshire Hathaway sold more than 3 million shares of Chevron stock in the March-ended quarter, New England Asset Management added 1,900 shares to its existing stake.
Macro factors are one reason oil and gas giant Chevron is so attractive right now. Multiple years of oil and gas demand uncertainty during the COVID-19 pandemic caused global energy majors (including Chevron) to pare back their capital spending. With the worst of the pandemic now in the rearview mirror, increasing the supply of crude oil has proved challenging. Making up for years of depressed capital spending won’t happen overnight, and it’s helping to lift the spot price of crude oil.
Chevron is also in the process of acquiring Hess in a $53 billion all-stock transaction. Assuming the deal gets the green light to close, Chevron will add 465,000 net acres in the oil-rich Bakken Shale and increase its oil-equivalent output in Guyana. Having one of the most flexible balance sheets among large-scale oil and gas companies makes major acquisitions and a premium dividend payout possible.
On top of generating substantial margins and operating cash flow from its drilling segment, Chevron is an integrated energy company. It owns transmission pipelines, chemical plants, and refineries, all of which produce predictable operating cash flow and help to hedge against downside in the spot price of crude oil.