Warren Buffett’s Berkshire Hathaway reveals new bets on Floor & Decor and Royalty Pharma

warren buffett
Warren Buffett.

  • Warren Buffett’s Berkshire Hathaway invested in Floor & Decor and Royalty Pharma last quarter.
  • The investor’s company exited Merck and cut its AbbVie and Bristol-Myers Squibb stakes.
  • Berkshire also trimmed its positions in Visa, Mastercard, and Charter Communications.

Warren Buffett’s Berkshire Hathaway built new stakes in Floor & Decor and Royalty Pharma in the third quarter, a regulatory filing revealed on Monday. The famed investor’s company also took a knife to several of its pharmaceutical and financial holdings in the period.

Berkshire owns scores of businesses including See’s Candies and Geico, and holds multibillion-dollar stakes in Apple, Coca-Cola, and other public companies. It disclosed a new, $99 million position in Floor & Decor, a flooring retailer, and a $475 million stake in Royalty Pharma, which funds clinical trials in exchange for royalties.

Buffett’s company exited Merck, Organon, and Liberty Global. It also cut its AbbVie and Bristol-Myers Squibb positions by 30% and 16% respectively last quarter, despite only adding those names to its portfolio in the third quarter of last year. Moreover, it trimmed its Visa, Mastercard, Charter Communications, US Bancorp, and Marsh & McLennan holdings.

On the other hand, Berkshire boosted its Chevron stake by 24%, after halving its position in the energy group in the first quarter of this year, and trimming it even more in the second quarter.

Berkshire’s limited tweaks to its portfolio were foreshadowed in its recent third-quarter earnings. They showed the conglomerate spent $1.4 billion on stocks and sold $3.4 billion worth in the period, meaning it disposed of a net $2 billion of equities in the period.

That might seem like a lot, but Berkshire’s stock portfolio was worth $293 billion in total at the end of September. Moreover, the company boasted $149 billion in cash and short-term investments, its latest earnings showed.

Buffett has been itching to deploy a chunk of Berkshire’s cash on a big stake in a public company or an elephant-sized acquisition for years. However, he’s struggled to find bargains with stocks near record highs, and private equity firms and SPACs pushing up the prices of businesses.

In the absence of any great deals, Buffett has plowed billions of dollars into stock buybacks. In fact, his company is on track to repurchase a record $25 billion of its own shares this year.

Read more: Finance guru Whitney Tilson breaks down why Warren Buffett’s Berkshire Hathaway is the ultimate ‘stay rich’ stock — and explains why he’s not worried about $7 billion in net stock sales this year

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JPMorgan beats estimates again in the 2nd quarter amid record quarter for investment banking

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JPMorgan CEO Jamie Dimon.

  • JPMorgan beat estimates once again in the second quarter, with earnings per share of $3.78.
  • The bank’s investment banking arm posted record numbers, and the firm also received a $2.3 billion boost by reclaiming money that had been set aside to cover bad loans.
  • JPMorgan boss Jamie Dimon said customers and clients were faring well as the economy reopened.
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JPMorgan again beat expectations with its second-quarter earnings, as the banking giant benefited from record investment-banking fees and the release of cash set aside to cover loan losses.

The lender’s revenue came in at $31.4 billion, it earnings showed on Tuesday. That was above the $29.9 billion analysts had been expecting but down from $33.8 billion in the same quarter a year earlier.

Net income stood at $11.9 billion in the second quarter, boosted by the release of $3 billion that had been put aside to cover bad loans, which added $2.3 billion to the bottom line after charge-offs. Net income was up 155% from $4.7 billion a year earlier.

Earnings per share came in at $3.78, above expectations of $3.21 and up 174% from the same quarter in 2020.

Here are the key numbers:

  • Earnings per share: $3.78 vs. $3.21 expected.
  • Revenue: $31.4 billion vs. $29.9 billion expected.

“JPMorgan Chase delivered solid performance across our businesses,” said Chairman and CEO Jamie Dimon.

“This quarter we once again benefited from a significant reserve release as the environment continues to improve… Consumer and wholesale balance sheets remain exceptionally strong.”

Read more: UBS names 6 bank stocks to buy as successful stress tests open the door to buybacks and dividends – and highlights 2 laggards to avoid

The Wall Street lender, the biggest in the US by assets, is seen as a bellwether company whose earnings give a sense of the health of the economy. Its results on Tuesday showed how banks are benefitting from rapid economic growth which has made much of the money they set aside in 2020 to cover bad coronavirus loans redundant.

JPMorgan’s earnings also showed that its investment banking arm fared well in the second quarter despite quieter markets. Investment banking fees rose 25% year on year to a record high of $3.6 billion, largely driven by the boom in mergers and acquisitions.

The bank’s stock was down 0.63% in pre-market trading after the earnings were released, at $157.00. It has risen more than 20% in 2021 as so-called cyclical stocks have benefited from a lifting of coronavirus restrictions and strong economic outlook.

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Warren Buffett dumped Goldman Sachs, JPMorgan, and other bank stocks last year. They’ve now surged to record highs, meaning the investor left billions on the table.

warren buffett
Warren Buffett

  • Warren Buffett might regret dumping bank stocks given their positive outlook.
  • Buffett’s Berkshire Hathaway sold Goldman Sachs, JPMorgan, and most of Wells Fargo.
  • Bank stocks have hit new highs and stand to gain as the economy reopens.
  • See more stories on Insider’s business page.

Warren Buffett might be kicking himself for selling the banks, as their prices have rebounded to pre-pandemic levels and several are flirting with fresh highs.

The famed investor’s company, Berkshire Hathaway, sold its stakes in Goldman Sachs, JPMorgan, M&T Bank, PNC Financial, and Synchrony Financial during the past five quarters. It virtually eliminated its historic Wells Fargo position as well, and trimmed its bets on US Bancorp and BNY Mellon. It only added to a single bank holding in the period, Bank of America.

Buffett dumped the banks because he feared Berkshire was overexposed to the sector and could suffer if the pandemic worsened, he said at Berkshire’s recent shareholder meeting. “We overall didn’t want as much in banks as we had,” he said.

Read more: Warren Buffett has a $80 billion headache when stocks and businesses are this expensive. Here’s a look at the investor’s big dilemma – and the unhappy compromise he’s made.

The investor also pointed out that the banks have the Federal Reserve as a safety net if the financial system freezes up, but Berkshire doesn’t. “It’s up to us take care of ourselves,” he said.

Buffett may be sleeping more soundly, but he missed out on significant gains. For example, Berkshire’s Goldman stake was worth $2.8 billion at the end of 2019; it would have fetched $4.3 billion today. JPMorgan, PNC, and Synchrony are also trading at record levels, while Wells Fargo and M&T have rallied to 15-month highs.

Moreover, Buffett didn’t sell the banks and buy something better instead. He has struggled to find compelling uses for Berkshire’s cash reserves, which exceeded $140 billion at the last count. His company sold about $13 billion of stock on a net basis over the past five quarters, and only spent about $4 billion on acquisitions. In fact, Berkshire’s biggest splurge in 2020 was spending $25 billion repurchasing its own stock.

Read more: Warren Buffett slammed Robinhood, touted tech stocks, and questioned his own holdings at Berkshire Hathaway’s annual meeting. 6 experts explain why.

Buffett risks missing out on further gains too. Bank stocks stand to benefit from the US economy reopening, higher interest rates, a booming stock market, and regulators approving bigger dividends and buybacks in the coming months.

In short, Buffett sold his bank stocks well below their current prices, won’t benefit from any further gains they make in the coming months, and has been earning a meager return on the sale proceeds. His saving grace is Bank of America – Berkshire’s 1 billion shares in the lender have surged in value by 18% since the start of last year to $42 billion today.

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The rotation trade is only halfway through, and these 5 sectors will continue to outperform until it’s over, Goldman Sachs says

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The Wall Street bull in the financial district January 22, 2007 in New York City.

  • Goldman Sachs’s Lou Miller said he believes the rotation trade is only “halfway through” in a new Daily Check-In podcast.
  • Miller highlighted the energy, materials, financials, industrials, and consumer discretionary sectors as top performers.
  • He also talked about the effects of inflation and said investors might look to Europe and emerging markets for their “reopening trade” moving forward.
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The rotation trade is only halfway through, and the industrial, financial, energy, consumer discretionary, and materials sectors will continue to outperform until it’s over, according to Goldman Sachs.

In a new Goldman Sachs’ “Daily Check-In”, Lou Miller, the vice president of equity structuring and sales strategies, said that he believes the rotation trade is set to continue.

“I think we’re definitely halfway through this trade, but I don’t think we’re close to the end. I think there’s still room for this rotation to continue,” Miller said.

The rotation trade is an ongoing move by investors away from highly-valued growth and tech-related stocks to more value-oriented names.

The reasoning behind the trade involves rising growth and inflation expectations – thanks to vaccines and stimulus – which may lead the Fed to increase interest rates and pull back on asset purchases.

That puts pressure on growth stocks which are valued based on discounted future earnings. When the discount rate changes due to increased interest rate expectations, tech and growth stock valuations are called into question.

A new study released by E*Trade on May 3 illustrates the prevalence of the ongoing rotation away from high-flying tech and growth stocks, even by retail investors.

The top three sectors retail investors entered in April were energy, industrials, and communication services.

Miller highlighted a similar basket of sectors for investors to consider in his recent Daily Check-In podcast

Miller said that the industrial, financial, energy, consumer discretionary, and materials sectors are all set for a strong performance while the rotation trade remains in play.

The VP highlighted the fact that the energy, materials, and industrials sectors make up just 14% of the S&P 500 while tech shares account for double that figure. That also doesn’t take into account that Amazon, Tesla, Facebook, and Google aren’t classified as tech stocks.

Miller said that the low market cap illustrates there is room to run in these sectors even after multiple months of the rotation trade.

When asked which sectors investors have been rotating into and should outperform moving forward, Miller said:

“It’s clearly these commodity-sensitive areas of the market like energy and materials, these real economy areas such as industrials, and the reopening sector such as consumer discretionary and then lastly financials. Financials is one of those sectors that is classically considered value.”

Miller also highlighted the growing effects of inflation on a basket of stocks and said his team is looking for “winners and losers there.”

Looking forward, Miller said investors should consider the reopening trade for Europe and emerging markets and be aware of the effects of Biden’s infrastructure spending and tax increases on American equities.

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Value stocks will continue to rally into 2021-but overall S&P 500 returns will be tepid, says BofA

NYSE Trader smile happy
Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 13, 2020 at Wall Street in New York City.

  • A recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian. 
  • But a prospective value stock rally is not necessarily bullish for the broader S&P 500, said the analysts, as the benchmark index is already at extreme levels of valuation and value stocks won’t be able to lift the entire index higher. 
  • “Our value call underpins our tepid outlook for the S&P 500,” said BofA. “But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”
  • Visit the Business Insider homepage for more stories.

The recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian.

In a Wednesday note to clients, the analysts highlighted that the Russell 1000 Value index has outperformed growth in the last three months, but the bargain-stock rally isn’t over.

“Despite the recent rotation, extreme valuations and entrenched positioning suggest we are in the early innings of a Value cycle. The relative discount for Value stocks remains nearly two standard deviations below average…” said BofA.

The financials sector is BofA’s top pick for value stocks. They also see opportunities in value-oriented cyclical industries like autos and multiline retail. The tech sector fell to the bottom of BofA’s list. 

But any rally in value stocks is not necessarily bullish for the broader S&P 500, said the analysts. In fact,Savita Subramanian sees the S&P 500 finishing 2021 at 3,800-only a 3% gain from current levels.

Read more:Morgan Stanley is warning that the stock market’s economic recovery trade may soon be over. Here are 4 strategies they recommend for finding the returns that still exist.

The analysts explained that the broader market is already richly valued and may not be able to climb much higher.  A value stock rally won’t be able to lift the entire market.

“Our value call underpins our tepid outlook for the S&P 500,” said BofA.” But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”

The bank remains cautious on stocks in the near-term, as valuations are rich and levels of optimism are at highs not seen since the Great Financial Crisis. The S&P 500 had the best November since 1928, soaring 11%, the analysts said.

“A lot of optimism is baked into stocks, along with rich valuations…and we remain cautious in the near-term. The medium-to-long-term bull case for stocks over bonds remains, although equity returns are likely to be sub-average (~5%),” added BofA.

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