Warren Buffett Continues to Buy Stocks | His Most Recent Purchase

One of the best ways to learn about investing is to follow the portfolios of investors you respect. An investor whose portfolio I personally follow very closely is Warren Buffett. When investors like Buffett's Berkshire Hathaway buy a large amount of a certain stock, they have to disclose that for the entire world to see. Interestingly enough, when it was recently released that Buffett had bought 4.2 billion dollars' worth of this one stock, the new cent shares up a whopping 20%.

This shows the power of the Buffett name. The fact that investors have to disclose what stocks they are buying and selling allows us to get an inside look at their portfolio and better understand the investments they are making. By studying the different investments prominent investors like Buffett makes, it helps us learn and better understand their investment strategy, ultimately improving our own investment skills in the process. That is the goal of this video, so make sure to stick around to the end as I'm sure there are takeaways that you can apply to your own investing process. Also, make sure to like this video and subscribe to the channel if you aren't already because a ton of research goes into making these videos, and it really helps out a ton.

Now let's jump into the video. Just a matter of weeks ago, Warren Buffett released his annual letter to shareholders. In this letter, Buffett talked about how he and his business partner, legendary investor Charlie Munger, had "failed investors" because they had not been able to find any significant investments to make. As a result, Buffett's company Berkshire Hathaway had a pile of cash totaling over 140 billion dollars. Buffett was clear in this letter that he would much rather have that money be invested in great businesses and generating returns for Berkshire Hathaway shareholders instead of just piling up.

This had some people even criticizing Buffett as outdated and that he had lost touch with what was going on in the market. This is not the first time Buffett has been called outdated. For those of you who know the game of baseball, Buffett describes the feeling as being a batter and watching pitch by pitch go by and not swinging. "Oh wow," people in the stands are yelling, "swing you bum!"

However, it's interesting just how fast things can change in the investing world. Shortly after proclaiming he failed investors, and just in the past couple of weeks, Berkshire Hathaway has made a series of large investments that have gotten a ton of attention. This includes agreeing to buy insurance company Allegheny, ticker symbol Y, for 11.6 billion dollars. Allegheny, in many ways, is essentially a much smaller version of Berkshire Hathaway, as the company has insurance operations but also owns other non-insurance companies.

Interesting fact: one of those non-insurance companies, and likely the most valuable company that Allegheny owns, makes the Squishmallow toy, which apparently, as I found out in my research for this video, is one of the hottest toys right now. The other sizeable investment Buffett made was buying billions of dollars of oil company Occidental Petroleum, ticker symbol OXY, including the additional shares Buffett can purchase at a predetermined price from his original investment in Occidental back in 2019. Buffett has the ability to own more than a quarter of all Occidental stock. This leads some people to speculate that he may even be getting ready to buy the entire company and put more of that cash pile to work.

Now let's get into looking at Berkshire Hathaway's most recent investment. Recently, it was disclosed that Berkshire Hathaway took an 11.4 percent stake in the PC and printer company HP, ticker symbol HPQ. This stake was worth roughly 4.2 billion dollars as of the announcement, and is what normally happens when it gets announced that the Oracle of Omaha is buying shares in a company. The stock skyrocketed after the announcement; HP stock was up more than 20% after the investment was announced, and the stock finished the day up around 15%. Just based on the price reaction from the investment being announced, the value of Buffett's stake in the company increased by more than 600 million dollars.

When the founders of HP, Bill Hewlett and David Packard, founded Hewlett-Packard in Palo Alto, California, way back in 1939, Berkshire Hathaway founder Warren Buffett was only eight years old. Now, 83 years later, Buffett added HP to his long list of storied investments. If you're looking to add some stocks to your personal portfolio, you can get five free stocks worth anywhere between twenty-seven dollars and ninety-six hundred dollars when you open an account with Webull. Just sign up using the link in the description and deposit any amount, and the free stocks you get could even be HP stock.

HP Inc. is one of the two companies created from the breakup of Hewlett Packard back in 2015. HP makes a variety of computing devices including desktops and laptops for both commercial and consumer use. The company always makes tablets and point-of-sale systems. Point-of-sale systems, or POS for short, is the place where a customer makes a payment for products or services at a store. The company is also well known for its printers, which includes large commercial printers all the way down to the inexpensive printer I have in my own personal office. HP sells to individual consumers, small and medium-sized businesses, and larger enterprises, which includes customers in the government, health, and education sectors.

The company generates around 35 percent of its revenue from the U.S., with the remaining 65 percent from non-U.S. customers. Obviously, a ton of research went into this video as I was learning about HP and the industry in order to provide you guys with quality content. That research was made way easier because of Quartr, the sponsor of today's video. I reached out to Quartr to sponsor this video as it streamlines the investment research process and should be a foundational tool for any fundamental investor. I was able to read through earnings call transcripts for HP to see what Wall Street analysts were saying about the company, as well as gain access to investor presentations on the company. The best part of this app is that it is completely free. Download the app at the link in the description to better understand the company Buffett's Berkshire invested in.

I think it's worth spending some time on HP's three business segments: Personal Systems, Printing, and Corporate Investments. Personal Systems makes and sells commercial PCs, consumer PCs, desktop notebook workstations, commercial tablets and mobility devices, retail point-of-sale systems, displays, and accessories, software, and support. This segment generates over two-thirds of HP's revenue. The Printing segment produces consumer and commercial printers, supplies, media services, as well as scanning devices. Put simply, HP's printing business model is to sell printer hardware at a discount and make profits from ink supplies.

Around one third of the company's revenue rolls out of this unit, and then the Corporate Investment segment includes HP Labs and business incubation projects. This segment produces a negligible amount of revenue as it is focused on developing future products. In the year 2021, HP generated over 63 billion dollars in revenue with a net profit of 4.6 billion dollars. Looking at the most important metric, free cash flow, HP generated 5.8 billion dollars in free cash flow in 2021. HP style currently trades at around 38 per share and has a market cap north of 40 billion dollars as of the making of this video.

Even after the stock popped after Buffett's investment was announced, the stock is still trading at a P/E ratio of less than 10, at 9.8 times. If you are a follower of Buffett, this investment may stick out to you for one big reason: HP is a tech company. Historically, Buffett is well known for his refusal to invest in any type of tech company, and given Buffett's apprehension towards investing in technology companies, it is ironic that HP's predecessor company, Hewlett Packard, is in many ways the first Silicon Valley tech company.

All the way back in 1938, engineers Bill Hewlett and David Packard started Hewlett Packard in a garage in Palo Alto, California, with 538 dollars. This really kicked off the wave of tech companies in Silicon Valley and laid the foundation for Silicon Valley to become the most technologically innovative place on the planet. The reason Buffett has sworn off investing in technology companies is that he is believed that technology companies are not what he refers to as a "circle of competence." This concept is a foundational part of Warren Buffett's investment strategy.

Buffett only invests in companies that fall within his circle of competence. In order for a company to be in the circle, Buffett not only has to understand the company, but he also has to be able to come up with a reasonable prediction of what that company is going to look like in 5 or 10 years. This is because when you are valuing a stock to potentially buy, you have to be able to predict how much cash that business is going to be able to generate in the future. Buffett makes the argument that this is extremely difficult to do for the vast majority of tech companies.

Technology companies tend to operate in industries that are rapidly changing. This means that the leader of the industry now could be taken away by a startup with better technology in the future. Because of this, Buffett has argued that it is incredibly difficult to value many tech companies, and he has avoided investing in those types of businesses. Instead, Buffett has focused on investing in companies with industries that are less likely to change. Think about Coca-Cola and soft drinks, BNSF in the railroad industry, or GEICO with car insurance. It's not that these industries don't change over time; it's just that the rate of change in these industries is much slower.

The concept of circle of competence is one of the biggest takeaways smaller investors can have from studying Warren Buffett and his investment principles. It's also important for us as investors to consistently work on expanding our circle of competence by learning about different businesses and industries. For Buffett, this included hiring two younger investors to work underneath him, Todd Combs and Ted Weschler. These younger investors arguably have a better understanding of technology businesses and are actually credited with introducing Buffett to Apple, a tech company that is now by far Buffett's biggest stockholding.

It's very possible that one of those two investors were behind the decision to invest in HP. I also think it's worth noting that compared to some other technology-focused industries, the industries that HP operates in are relatively slow-moving. Take the printer market, for example, which accounts for roughly one-third of HP sales. HP and the other big player in the industry, Canon, routinely have a market share in the range of 40 to 50% pretty consistently year in and year out. The global printer market is by no means a high-growth industry. It is by pretty much all accounts a very mature industry and may actually be shrinking as more paperwork is now digitized and done online.

With this being said, the industry isn't going to disappear overnight, and this part of HP's business can still be profitable for the foreseeable future. There is another big reason why Buffett would like HP stock: share repurchases. Buffett has frequently talked about how powerful share repurchases can be for long-term investors. In his 2020 annual letter, Buffett said the following about share repurchases: "The math of repurchases grinds away slowly but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses."

Let me show you what Buffett means by using HP as an example. As of the making of this video, HP had a market cap of around 40.7 billion dollars. The company also had 1.082 billion shares outstanding. This means that each share is worth around 37.62 dollars. This is how a per share price of a company is calculated: take the market cap of the company and divide it by the number of shares outstanding. Now, just doing some basic math, let's show what Buffett means about how share repurchases can be powerful over time.

Let's say that HP uses the cash the business generates to repurchase shares, and let's say that the company repurchases five percent of the total shares it has outstanding. This reduces shares outstanding to 1.028 billion. Notice how even without increasing the market cap, it makes each share more valuable. Now a share is worth 39.60 dollars. Let's increase those repurchases up to 10% of total shares outstanding. That brings total shares outstanding down even further to 974 million. Notice how this continues to make each share worth more; now a share is worth 41.80 dollars.

Now, let's say that over a multi-year period, HP is able to buy back 25 percent of its original shares outstanding. This brings current shares outstanding all the way down to 812 million, and notice the impact it has on the share price. Now a share is worth 50 dollars and 15 cents, all the way up from 37.62 at the start of this example. This simple example shows just how powerful share repurchases can be. Each share becomes more valuable because it represents a larger ownership stake in the business. It's the same logic as if you and a group of people are splitting a pizza. If you are sharing the pizza with over seven people, your share of the pizza is going to be a lot smaller than if you're only sharing it with three people.

It's the same for stocks; as a company buys back shares and decreases the total number of shares outstanding, the percentage of the company that you own goes up because the company's ownership is getting split amongst fewer shares. Now I'm sure Buffett would be the first person to say that share repurchases by themselves are no reason to invest in a company. However, they can be a great way for long-term investors to see their ownership stake in a company increase without the investor having to buy any more shares. That's essentially what HP is doing right now. They have repurchased a whopping 26% of their shares outstanding over the past two years.

Additionally, management has committed to repurchasing another four billion dollars worth of shares over the next year, which works out to around another 10 percent of their current shares outstanding. If you're interested in accessing the spreadsheet as well as other spreadsheets I used to analyze my personal investments, you can check out those at my Patreon at the link in the description of this video. Thanks so much for watching. Make sure to like this video and subscribe to the investor center because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.