Berkshire Hathaway’s portfolio adjustment suggests Warren Buffett and Charlie Munger are worried about recession. | Image: REUTERS/Scott Morgan/File Photo
- Berkshire Hathaway has moved into defensive stocks as stakes in recession-prone companies were cut.
- Warren Buffett’s heavy exposure to financials is now lower.
- Charlie Munger recently warned of “lots of troubles” ahead for the economy.
Warren Buffett’s most recent stock purchases point to growing concerns that an economic downturn is right ahead.
A Feb. 14 SEC filing shows that Berkshire Hathaway (NYSE:BRK.A) is putting money in stocks that are relatively immune from negative economic growth. At the same time, Berkshire has reduced its stakes in companies that are likely to be the hardest hit by an economic downturn.
What did Warren Buffett buy and sell?
According to the SEC filing, Berkshire Hathaway initiated a stake in retailer Kroger (NYSE:KR) buying nearly 19 million shares. Berkshire now holds about 2.4% in the largest grocery retailer in the U.S. Based on Friday’s closing price the stake is worth over $500 million.
Typically during an economic downturn, consumer staples outperform as consumption is largely restricted to must-haves. Groceries and other fast-moving consumer goods obviously fall in this category.
In the past, value-oriented retailers such as Walmart (NYSE:WMT) and Kroger have recorded profit growth even in periods of downturn. For instance, Walmart’s net income between 2008 and 2010 rose year after year as Americans flocked to the big-box retailer in a bid to stretch their dollars.
Classic recession beaters
The stocks of the two retailers have equally withstood the bearish sentiment during past recessions. In the past five recessions both WMT and KR beat the S&P 500 Index, solidifying the place of value-oriented retailers as worthy defensive stocks.
In addition to being a classic defensive play, Kroger is currently undervalued. It bears a consensus analyst rating of “Overweight.”
Analysts have overwhelmingly vouched for Kroger. | Source: WSJ.com
Kroger’s stock stands to benefit from a buyback plan. Between $0.5 billion and $1 billion have been allocated for the stock repurchase plan.
Another classic defensive stock that Warren Buffett bought per the SEC filing is Biogen Inc (NASDAQ:BIIB).
During economic downturns, demand for healthcare experiences relative inelasticity. Notably, pharmaceutical firms such as Bristol-Myers Squibb (NYSE:BMY) and Pfizer (NYSE:PFE) recorded sales growth of 8% and 7% respectively in 2009. Even as the S&P 500 Index plunged in 2008, another pharmaceutical stock Amgen, Inc (NASDAQ:AMGN) appreciated nearly 24%.
This time round, Biogen could replicate what rivals did in recessions past. The pharmaceutical firm comes as the company’s treatments for spinal muscular atrophy and multiple sclerosis increased revenues and profits significantly last year.
Apple turns sour for Warren Buffett
The Oracle of Omaha has reduced his stake in Apple (NASDAQ: AAPL) by 1.5%. While not really a stock dump, it’s indisputable that consumer discretionary companies suffer during economic downturns. As Apple sells mostly high-end computing devices, in a recession consumers are likely to delay purchasing a new device or upgrading.
Berkshire’s reduced Apple stake is coming at a time when the iPhone maker has lost its position as the Dow’s leading gainer to tech rivals IBM (NYSE: IBM), Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC).
Even by cutting its stake in AAPL to over 245 million shares, Berkshire Hathaway is still Apple’s second-largest owner.
Top owners of Apple. | Source: CNN.com
A Berkshire Hathaway bank run… sort of
That Warren Buffett has a particular affinity for financial stocks is not a secret. As of Q3 2019, almost half of Berkshire Hathaway’s portfolio consisted of banks and insurance firms. Now the investing conglomerate has moved to reduce its exposure in financials.
The most affected is Goldman Sachs (NYSE:GS) where Berkshire Hathaway has cut its stake by 35%. The investing conglomerate additionally reduced its interest in Wells Fargo (NYSE:WFC) by 15%. Stakes in Bank of New York Mellon Corp (NYSE:BK) and Bank of America (NYSE:BAC) fell by 1.5% and 0.24% respectively.
In case of an economic downturn, it’s inevitable that central banks will cut rates to revive growth. This has the effect of reducing banks’ lending margins.
Besides Berkshire Hathaway’s stock moves, Warren Buffett’s sidekick Charlie Munger recently warned that the economy is headed for “lots of troubles.” Berkshire’s portfolio realignment has just underlined that.
This article was edited by Sam Bourgi.