brand new Berkshire Hathaway CEO Greg Abel began his tenure as the company’s new chairman in an 18-page letter to shareholders that sheds light on many details about how Abel plans to run the broader company, how Berkshire currently operates, how it’s positioned for the future, and other, perhaps surprising comments about Berkshire’s $8 billion, $31 billion megaproject plans.
For example, Abel identified four key positions in Berkshire’s portfolio — Appl, American Express, coca colaand Moody’s — that he expects will “combine over decades” and experience “limited performance,” without any fundamental change in their long-term prospects. What is equally interesting is that Abel did not include two of Berkshire’s current top five positions in the group. Are these two stocks now on the chopping block?
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A stock not mentioned as a “main holding” by Abel Bank of America(NYSE: BAC )the second largest bank in the United States by assets and the fourth largest position in Berkshire’s portfolio. While dumping much of its bank stock during the pandemic, Berkshire loaded up on Bank of America, indicating it would be its top big bank. While Buffett and Berkshire have a long history with the banking sector, they have also clearly hurt the industry.
Berkshire has also cut its stake in Bank of America in half over the past few years. In 2011, after the Great Recession, Berkshire invested $5 billion in Bank of America, in exchange for preferred stock and warrants that allowed it to acquire 700 million common shares at $7.14 each in 2017, so Bank of America was undoubtedly a great investment for Berkshire.
However, Berkshire may not consider banks as long-term businesses as they once were. The sector has been struggling since the Great Recession and has lagged the broader market in terms of net returns. If Berkshire is worried about the crisis, which it seems to be based on its cash hoards and lack of buyback activity in recent years, it might want to shore up its banking as well.
Now, that doesn’t mean that Berkshire will necessarily destroy Bank of America, but the fact that it doesn’t list the company among its core holdings and has sold a significant amount certainly puts it on the chopping block. The stock trades at about 175% of Bank of America’s book value, or net worth, which is at the high end of its 10-year valuation range, though not the top, so Berkshire may ultimately prefer to find banks with cheaper valuations.
A major US oil and gas player Chevron(NYSE: CVX ) There is another stock that Abel does not specifically name. This surprised me a bit, given that Berkshire has loaded up on US energy assets in recent years and that Abel ran Berkshire Hathaway Energy. Based on its recent purchases, Berkshire seems to believe that conventional fossil fuels, or electricity in general, will be more valuable in the future, especially those produced by US-based companies.
Until concerns about the recent conflict between the US, Israel and Iran, the price of oil had fallen to $60 per barrel. Still, Chevron’s stock performed relatively well, maintaining a strong balance sheet, despite borrowing heavily to acquire Hayes. Berkshire actually sold some Chevron back in 2022, but has only increased its position since the second quarter of 2023.
Chevron does a lot of things that one would think the Berkshire team would approve of. The Hess acquisition provides the company with a leading portfolio that it believes offers industry-leading margins. Meanwhile, the company’s net debt-to-cash flow ratio remains strong at 1x. Chevron has repurchased $12 billion in stock by 2025. Based on the company’s first quarter guidance for this year, it will remain at the same pace. Chevron’s trailing 12-month dividend yield is also very strong, at nearly 3.8%.
Considering the existing infrastructure in Venezuela, Chevron is also the best oil infrastructure to benefit from changes in Venezuela. The company has said it plans to triple production in March from December levels. Finally, the stock acts as a hedge against tensions in the Middle East as rising oil prices benefit it, so while I find it odd that Abel hasn’t included it as a core hold, I’m less likely to believe it’s on the chopping block at this point.
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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the listed stocks. The Motley Fool owns and recommends positions in Apple, Berkshire Hathaway, Chevron, and Moody’s. Motley Fool has a disclosure policy.
New CEO Greg Abel did not list 2 of Berkshire Hathaway’s largest equity positions as “core holdings.” Are they on the chopping block? Originally published by Motley Fool
