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The 5 Biggest Surprises From Buffett's Q3 Portfolio Update

In case you missed it, this past Monday, Nov. 16, was arguably the most important day of the entire quarter for investors. That's because it marked the release of 13F filings from money managers with $100 or million in assets under management.

In simple terms, a 13F provides Wall Street and retail investors with an under-the-hood look at what the brightest money managers were up to during the previous quarter. Even though the data provided is, at minimum, six weeks old, it nevertheless offers clues as to what trends and stocks are dominating interest among the most heralded investors.

Within the investment community, there's probably not a money manager more closely followed than Warren Buffett. The CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) has, after all, delivered a greater than 2,700,000% return for shareholders over the past 55 years. What Buffett is buying and selling is usually of great interest.

In the most recent quarter, Berkshire Hathaway's 13F certainly provided its fair share of surprises. Not including what we knew prior to Nov. 16 via Securities and Exchange Commission filings, here are the five biggest surprises.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

1. Berkshire goes all in on Big Pharma

Certainly the biggest eyebrow-raising moment was finding out that Buffett's company had taken stakes in Big Pharma stocks Merck, Pfizer, AbbVie, and Bristol Myers Squibb. It's no secret that the race to a coronavirus disease 2019 (COVID-19) vaccine could be a big moneymaking event, and it appears Berkshire Hathaway wanted its piece of the pie.

What makes this move so interesting is that Buffett has not been a fan of drug stocks in close to a decade. Since selling off the majority of Berkshire's stake in Johnson & Johnson following its Synthes acquisition announcement, Buffett has declined to make serious purchases of drug stocks. I suspect this has to do with the Oracle of Omaha not having the time or desire to follow up with clinical trial results.

The point is, Buffett's aversion to pharmaceutical stocks makes it very likely that his investing lieutenants, Todd Combs and Ted Weschler, are the masterminds behind this Big Pharma exposure. Buffett may have given the OK for these additions, but I'd be willing to wager they weren't his idea.

Image source: Getty Images.

2. Bye-bye, Costco?

Another moment that jaw-dropped the investment community was the realization that Berkshire Hathaway had sold its entire 4.33-million-share stake in warehouse club Costco Wholesale (NASDAQ: COST) during the third quarter.

To put this into perspective, Costco was tied with Moody's as Warren Buffett's fifth-longest held stocks. It had been a staple in Berkshire Hathaway's portfolio since 2000, primarily because it's been a staple of American consumers for decades. The company's ability to buy in bulk has pushed its prices well below most grocers, while its membership model helped to boost margins and keep customers loyal to the brand.

Why did Buffett's company sell? It could have to do with Costco's premium valuation of more than 35 times Wall Street's earnings forecast for 2021. More than likely, I suspect Buffett and his team are concerned with the longer-term impact of online sales on Costco's business model. Whatever the reason, I believe Buffett and crew will regret selling Costco.

Image source: Getty Images.

3. All that glitters is quickly pared down

Berkshire Hathaway's 13F also showed that gold stock Barrick Gold (NYSE: GOLD) was pared down by 42% during the third quarter. That's exceptionally odd given that it was first added to the portfolio during the sequential second quarter.

The thesis behind owning gold stocks right now is simple enough to understand. Approximately $17 trillion in global investment-grade debt sports a negative yield, and the U.S. Federal Reserve has been adamant about keeping interest rates at or near record lows. This is a fancy way of saying that income investors have few avenues to collect inflation-topping returns, which should have folks choosing gold as a store of value. Barrick Gold should be privy to higher average realized prices for the precious metals it sells as a result of these low bond yields.

However, Buffett has never been a fan of the lustrous yellow metal. In the Oracle of Omaha's view, gold lacks utility and its costs money to store, making it a poor investment. This virtually ensures that Combs or Weschler made Barrick their initial buy in the second quarter, and they chose to pare down this stake in the third quarter. Such back-and-forth trading action is very odd for a Buffett-run portfolio.

Image source: Getty Images.

4. M&T, see ya later?

It was also a bit of a shock to see that Berkshire Hathaway had sold off more than 1.6 million shares of northeastern regional bank M&T Bank (NYSE: MTB) during the third quarter. This marked a 35% reduction for Buffett's company in its fourth-longest-held stock (24 years).

On one hand, this sort of fits with Buffett's recent selling activity in financials. The Oracle of Omaha and his investing team have been big-time sellers of Wells Fargo and JPMorgan Chase in 2020, and Buffett completely sold out of investment bank Goldman Sachs earlier this year. It's possible Buffett views the Fed's multiyear promise of record-low interest rates as too much of a dead-money risk for financials, which would include M&T Bank.

Then again, M&T Bank consistently offers some of the highest return on assets among regional banks, which makes it one of the most conservative and profitable bank stocks to own. With the company hovering right around its book value, I'd contend it's more palatable as a stock to buy than pare down.

Image source: Getty Images.

5. Hello, again, telecom stocks

The fifth and final surprise was the opening of a new position in telecom giant T-Mobile (NASDAQ: TMUS). This new position of 2.4 million shares equates to $276 million in market value, as of Sept. 30, 2020.

What's intriguing about this move is that Buffett sold off his company's stake in Verizon and AT&T a few years ago, implying that he wanted nothing to do with the slow-growing but high-yielding telecom sector. Given Buffett's general avoidance of tech and telecom, this purchase has all the hallmarks of being made by Combs or Weschler.

Why T-Mobile? I believe it has everything to do with the 5G revolution. We're witnessing the first major upgrade to wireless download speeds in about a decade, and that's going to lure businesses and consumers to upgrade to devices capable of 5G download speeds. This isn't going to happen overnight, which means a multiyear upgrade cycle, and plenty of high-margin data opportunities for T-Mobile.

This should be a good pickup for Buffett and company, but it sure does show how passive the Oracle of Omaha has become within his own portfolio.

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Sean Williams owns shares of AT&T and Wells Fargo. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Bristol Myers Squibb, Costco Wholesale, and Moody's. The Motley Fool recommends Johnson & Johnson, T-Mobile US, and Verizon Communications and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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