Buffett’s Strategic Portfolio Adjustments
Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has been steadily reducing his stock holdings for seven consecutive quarters. However, he has not entirely abandoned the stock market. In the second quarter of 2024, Buffett made significant moves by adding to Berkshire's existing positions in five stocks and initiating new positions in two others, signaling his continued belief in specific opportunities within the market.
One of the most notable actions Buffett took was increasing Berkshire's stake in Occidental Petroleum (NYSE: OXY), a company he has consistently supported. This decision was unsurprising given Buffett's admiration for Occidental and its CEO, Vicki Hollub. Occidental has now become Berkshire's sixth-largest holding, highlighting Buffett's confidence in the company's future. In addition to Occidental, Buffett also purchased over 1.1 million shares of Chubb (NYSE: CB) in Q2, solidifying Chubb's position as the ninth-largest in Berkshire's portfolio. Chubb, an insurer that Buffett began investing in last year, has seen aggressive investment from Berkshire in recent quarters for these top 10 positions for the portfolio. However, news additions have been added spiking his confidence in a merger that is scheduled this year.
Buffett's Strategic Investment in SiriusXM Merger
Buffett's three other additions in Q2 were focused on Liberty Media Corp's Series A (NASDAQ: LSXMA) and Series C (NASDAQ: LSXMK) shares, as well as Sirius XM Holdings (NASDAQ: SIRI). Notably, Buffett increased Berkshire's stake in Sirius XM by more than 262%, buying an additional 96.2 million shares. Liberty Media owns a significant portion of Sirius XM's outstanding shares, making these investments closely related.
Among these investments, Sirius XM Holdings stands out as a particularly intriguing choice. The satellite radio company, which operates as a "legal monopoly" in the U.S. satellite radio market, has a business model heavily reliant on subscriptions. This model provides Sirius XM with a more predictable cash flow, making it potentially more resilient during economic downturns. Additionally, Sirius XM's shares are currently trading at a historically low valuation, which likely attracted value-oriented investors like Buffett.
The upcoming merger between Sirius XM and Liberty Sirius XM Holdings, expected to close in early September 2024, adds another layer of complexity and opportunity. The merger will involve a one-for-10 reverse stock split of Sirius XM shares. The spread between the two stocks has remained unusually large despite the approaching merger, reflecting the challenges of executing arbitrage trades due to the difficulty of shorting Sirius XM shares.
Berkshire Hathaway is set to become Sirius XM's largest shareholder after the merger, with an estimated 29% stake in the company. This significant ownership stake is partly attributed to Berkshire's savvy investment in Liberty Sirius XM, a tracking stock that has long traded at a discount to Sirius XM. This discount allowed Berkshire to acquire Sirius XM at a more attractive price, currently it trades at $3.14 but is forecasted to be worth $4 after the merger, giving a ~27.39% return.
The Case for Sirius XM and Beyond
Sirius XM has faced challenges, including a decline in paid subscribers and concerns about its ability to attract younger audiences who prefer streaming music from their phones rather than paying for satellite radio. Despite these challenges, some analysts view Sirius XM as a "free cash flow growth story" with a stable EBITDA and a significant portion of earnings translating into free cash flow.
In conclusion, while Warren Buffett has been a net seller of stocks in recent quarters, his targeted investments in companies like Sirius XM, Occidental Petroleum, and Chubb indicate that he still sees opportunities in the market. His approach remains focused on companies with strong market positions, stable revenue models, and the potential for long-term growth, even amidst broader market uncertainties.
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