There’s no longer a mystery about which stock Buffett has been buying hand over fist.
Warren Buffett knows how to keep a secret. He went months without identifying the “mystery stock” he began quietly adding to Berkshire Hathaway‘s portfolio in mid-2023. Berkshire secured U.S. Securities and Exchange Commission (SEC) approval to keep the purchases under wraps.
However, Berkshire spilled the beans in May. The giant conglomerate revealed that it had accumulated a 6.4% stake in property and casualty insurer Chubb (CB -1.08%) worth more than $6.7 billion at the end of the first quarter of 2024. It’s now Berkshire’s 10th-largest holding.
Chubb has been a big winner over the last 12 months, with its shares soaring nearly 40%. Should you buy Buffett’s high-flying mystery stock?
Why does Buffett like Chubb?
It isn’t hard to guess why Buffett probably decided to invest so heavily in Chubb. Most importantly, he almost certainly loves the company’s business model. As he emphasized to Berkshire Hathaway shareholders last year, he’s a “business-picker” rather than a stock-picker.
Buffett has long held insurers near and dear to his heart. He often sings the praises of Geico (and pitches its products to Berkshire shareholders). Chubb is unquestionably in his wheelhouse.
The Oracle of Omaha likes strong management teams with great track records. Chubb checks off this box too. CEO Evan Greenberg has over 48 years of experience in the insurance industry. He has led Chubb for two decades. During his time at the helm, the company has become one of the world’s largest insurers.
Chubb has rock-solid financials. Its assets top $225 billion. The company’s net income jumped 13.3% year over year in the first quarter of 2024 to $2.14 billion. Chubb’s annualized return on equity as of the end of Q1 was 14.3%. Standard & Poor’s credit rating for the company is AA (investment grade with a “very strong capacity to meet financial commitments”) — its second-highest rating level. AM Best rates Chubb at A++ (superior), its highest level.
Buffett might have strayed from the purist value investing philosophy espoused by his mentor, Benjamin Graham. However, valuation remains a top consideration for him before buying any stock. Chubb looks great on this front, with shares trading under 12.3 times forward earnings.
What’s not to like?
No matter how good a stock is, it’s going to have something that investors won’t like. Chubb is no exception.
Perhaps the biggest knock against Chubb is that Wall Street thinks it could have relatively limited growth potential. Although the company has delivered strong earnings growth in recent years, analysts surveyed by LSEG project average annual growth of only 2% over the next five years.
Income investors will probably find Chubb’s forward dividend yield of around 1.4% underwhelming. However, they’ll no doubt like that the company has increased its dividend for 31 consecutive years and has a low payout ratio of a little over 15%.
There’s also another angle with Chubb’s valuation that might make some value investors frown. The insurer’s price-to-book ratio is near its historic highs and well above the long-term average.
CB Price to Book Value data by YCharts
Should you buy Buffett’s mystery stock?
I view Chubb as a great fit for Buffett. It’s right up his alley in multiple ways. I also think it’s a good pick for some investors, although not for everyone.
As already mentioned, income investors might turn up their noses at Chubb. There’s no question that they can find other solid stocks with higher dividend yields.
Chubb probably won’t be a stock that growth investors prefer, either. That said, I suspect the company will be able to deliver stronger earnings growth than Wall Street predicts. There’s also a real possibility that Berkshire will continue to increase its stake in Chubb. If so, the conglomerate’s purchases could drive Chubb’s stock higher.
Finally, Chubb looks like a solid pick for value investors despite its historically high price-to-book multiple. I agree with CFRA Research that the company provides exposure to “one of the best-performing financial sector subgroups at a below-peer valuation.”
Keith Speights has positions in Berkshire Hathaway and Chubb. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.