Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) follows a value investing strategy based on Benjamin Graham’s approach. During the first-quarter, the “Oracle of Omaha” purchased more shares of Apple Inc. (AAPL, Financial), Bank of New York Mellon Corp. (BK, Financial), Southwest Airlines Co. (LUV, Financial) and American Airlines Group Inc. (AAL, Financial). On the sell side, Buffett divested his entire Twenty-First Century Fox Inc. (FOXA, Financial) stake and about 8.33% of his stake in Delta Air Lines (DAL, Financial). Unfortunately for investors, these companies have high price-sales valuations, suggesting limited value potential.
Berkshire CEO adds to two positions with high valuations
Buffett invested in nearly 71,997,454 shares of Apple, expanding his stake in the Cupertino, California tech giant 125.52%. While Apple’s share price averaged $131.33 per share during the quarter, the consumer electronics company trades near a 10-year high of $155.7 as of May 15. The current price is approximately $13 higher than the median price-sales valuation.
As discussed in previous articles, Apple has good growth potential despite declining operating and gross margins. Unfortunately for investors, Apple’s price-sales ratio is near a five-year high and ranks lower than 81% of global consumer electronics companies. Two gurus, Daniel Loeb (Trades, Portfolio) of Third Point LLC and Julian Robertson (Trades, Portfolio) of Tiger Management, axed their stakes in Apple as the company is significantly overvalued.
The “Oracle of Omaha” also invested in 11,340,090 shares of Bank of New York Mellon, an asset management company focused on providing services across the investment lifecycle. While BNY Mellon’s share price averaged $46.77 per share during the first quarter, the company currently trades around $47.20, which is near a 10-year high and about $8 higher than the median price-sales valuation.
Buffett adds to two airline positions, trims a third
The Berkshire CEO added 4,455,681 Southwest shares and 3,734,000 American shares for an average price of $53.78 per share and $45.24 per share. On the sell side, Buffett trimmed his Delta position 8.33%, selling 5 million shares for an average price of $48.90 per share.
The three airlines, especially Southwest and Delta, generally had price-sales ratios higher than the industry average over the past 10 years, implying significant overvaluation. Among the three airlines, Southwest currently trades the closest to its 10-year maximum price-sales valuation.
Buffett divests Fox
Buffett axed his 8,951,869-share stake in Fox, a major U.S. media conglomerate. The company’s share price averaged $30.56 during the first quarter.
Fox reported lower income from continuing operations during the quarter compared to first-quarter 2016, driven by lower segment operating income before depreciation and amortization (OBIDA, similar to EBITDA) in the Filmed Entertainment segment.
Fox’s share price dropped approximately $4 per share since reaching a 52-week high of $32.44 on March 28 as the company laid off Bill O’Reilly “after a thorough and careful review” of sexual harassment allegations according to a company press release. A Newsweek article further shed light on Fox News’ scandal, labeling the network as a “sex-fueled, Playboy Mansion-like cult.”
See also
As of May 16, Buffett’s market-valuation indicator reached 131.5%, which offers an expected annual market return of -0.9% including dividends.
Premium members have access to the value screeners, including the Buffett-Munger Screener. The following article details six stocks a young Buffett would buy based on the Berkshire co-managers’ four-criterion investing approach.
Disclosure: No positions.
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