Warren Buffett's Stock Buys are Sending a Big Signal

Is Warren Buffett feeling deja vu in 2023?

In the 1960s, growth stocks staged a big rally, with 50 of the top growth companies in cutting edge industries, like technology and pharmaceuticals, becoming so popular they were called the “Nifty 50.”

The Nifty 50 were considered “sure things” with investors willing to pay as high as 50x earnings to own the stocks under the belief that those innovative companies would keep growing at a fast pace forever.

By 1969, Buffett found nothing of value to buy, so he dissolved his investing fund and moved to the sidelines.

But the party finally ended in 1973, as the Arab Oil Embargo, a recession and the inflation that followed, rippled through the world’s global stock markets.

When the sell-off was over, the Dow had fallen 45% in 2 years.

Suddenly, there were many value stocks and Warren Buffett came back into the game, this time as CEO of Berkshire Hathaway.

In a now infamous 1974 interview with Forbes Magazine, Buffett could barely contain his giddiness.

Forbes asked how he felt about the market opportunities after the big sell-off and he replied, “Like an oversexed guy in a harem. This is the time to start investing.”

Buffett Spends $51 Billion Diving Back In

In the Forbes interview, Buffett talked about how 1974 reminded him of the early 1950s, when the Great Depression bear market finally ended and stocks were cheap.

“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices,” he said in 1974.

Sound familiar?

Buffett has been mostly on the sidelines since 2012, building a massive $144 billion cash position in Berkshire Hathaway. His last mega-deal was when he spent $26 billion to buy Burlington Northern railroad in 2009. He famously didn’t even buy any new stocks in the March 2020 coronavirus crash.

But suddenly, in 2022, with stocks off their highs by double digits, Buffett’s Berkshire Hathaway deployed over $51 billion of the cash hoard into energy stocks.

Energy was the best performing sector in 2021 and 2022, but, in another similarity to the 1970s, it was also one of the top performers of that decade.

Continued . . .


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3 Reasons Buffett is Buying Again

Buffett may have been giddy over the buying opportunities in stocks in 1974, but it turned out that the rest of the decade was a golden era for value investors, too.

There are 3 reasons why he’s buying again:

1) Value Stocks are Getting Cheaper

After topping out above 21 in 2021, the S&P 500 is now trading at 17.2x. That’s still well above the single digit P/Es of the late 1970s, which is why so many strategists think that stocks may have further to fall.

But forward earnings for some individual industries have plunged into the single digits. For example, Chevron is in the Oil and Gas – Integrated industry. That industry is trading with a forward P/E of just 5.4, which is well-below the S&P 500.

Similarly, energy stocks, which Buffett is buying again in 2023, are trading well below the average of the S&P 500 in both price-to-book and price-to-sales. The Integrated oil companies have an average P/B ratio of 1.3 compared to the S&P 500 at 4.8. Its P/S ratio averages 0.7, whereas the S&P 500 is at 2.4x.

2) Dividend Yields are Rising

Along with cheap valuations usually comes rising dividend yields. Not just 2% or 3%, but yields over 5%. The dividend aristocrats, those companies that have raised their dividend payouts for over 20 years, get cheaper than ever in a stock market sell-off, so not only are they raising their dividend, but the yield rises as the stock gets cheaper.

It was easy to get juicy dividends in the 1970s as those valuations dropped. And once again, Berkshire Hathaway is swimming in the dividend cash. Chevron, for example, is currently paying a 4% yield.

With 162.9 million shares, Berkshire Hathaway is on track to get dividend checks just from Chevron alone totaling $984.4 million this year. Not too shabby.

3) Dollar Cost Averaging Works

In Berkshire Hathaway’s 1978 letter to shareholders, Warren Buffett discussed their strategy of adding to their stock positions in their insurance portfolio as the bear market continued to rage on.

“We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be net buyers of securities,” Buffett wrote.

Dollar cost averaging works in value stock bulls because the Street is always late to the party in value stocks, leaving valuations to remain depressed for some time. It’s easy to add to your position and still get in at an attractive price.

Buffett was dollar cost averaging in 2022 and is doing so again in 2023.

In 2022, Berkshire added to its position in Occidental Petroleum throughout the summer, but stopped buying in Sep 2022. However, Occidental shares have fallen nearly 9% in the last 6 months and have gotten cheap again.

In early March 2023, Berkshire bought another $350 million and again, as the energy stocks fell further, it bought another $466 million the following week.

Buffett Gets Out the 1970s Playbook

Buffett, and Berkshire Hathaway are already mimicking the strategy of the 1970s.

Berkshire has started deploying its cash hoard into cheap companies that have record free cash flows, such as Chevron and Occidental Petroleum.

If value stocks continue to weaken, Berkshire will likely dollar cost average into what it considers to be the most attractive companies. It has already upped its stake in Occidental to 23.1% of the company this year. Occidental has a forward P/E of just 9.5.

While the overall stock market lagged until 1981, the top value managers, like Buffett and Fidelity’s Peter Lynch, became investing legends as value investing saw great success.

There will be new investing legends created in this decade’s value stock rally as well.

Are you ready to take advantage of the value stock opportunities like Buffett is?

Finding Today’s Top Value Buys

The Oracle of Omaha has raked in hundreds of billions of dollars over the years. He makes his biggest moves in market conditions like the one we’re in right now. The fact that he’s buying so aggressively now is a powerful signal.

There’s no shortage of “marked down” stocks with rock-solid fundamentals these days. Investors who get into great stocks at today’s prices are positioning themselves for spectacular gains over the longer-term. Warren Buffett clearly believes this is the case.

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Good Investing,

Tracey Ryniec

Stock Strategist Tracey Ryniec is editor in charge of Insider Trader and Value Investor portfolios.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research’s newsletter editors and may represent the partial close of a position.

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