Warren Buffett is one of my favorite investors of all time, and I’d wager a guess that most readers are on the same page. His “aw, shucks” Midwestern attitude, his ability to be calm and patient when nearly every other investor in the market is freaking out, and is inane sense of timing to understand the trends that are really going to impact long-term holdings that suggest buy and sell signals, makes him a favorite for investors looking for direction on how to position their portfolios moving forward.
Thus, when Buffett (and his team) decide to make a rather large bet on a mega-cap tech stock in the middle of what appears to be a market rout for many names in this space, investors take notice. Buffett will be stepping down as CEO of Berkshire Hathaway (NYSE:BRK-B) in a little more than a month, but he’s still making an impact at the firm he’s been CEO of for decades.
Let’s dive into Buffett’s recent $4.3 billion bet on Alphabet (NASDAQ:GOOG) and what this may portend for investors looking to follow in his footsteps heading into year end.
What Does This Investment Indicate?
Alphabet office building showing the Google logo
I think many investors can understand the fundamental rationale behind why a given institutional investor would put capital to work in a company like Alphabet. It’s a world-class company with a free cash flow machine unlike many others in the market right now.
That said, for an investor like Buffett who has historically steered clear of the tech sector broadly (outside of his Apple (NASDAQ:AAPL) bet made around a decade ago, which he’s continuing to unwind), this is a move that may raise a few eyebrows among investors right now.
Some may speculate whether this move really was Buffett, or if his team and the new coming CEO Greg Abel is behind this trade. And while Buffett has historically held onto his big bets for years (and in many cases decades), there’s a broader question around whether this move is indeed a trade or intended to be a long-term position in the Berkshire portfolio.
I suppose we’ll have to wait for more clarity from the company’s incoming CEO, with Greg Abel set to take the mantle on New Year’s Day.
But until then, investors will certainly have plenty to debate. Maybe that’s the point.
This Looks to Be a Fundamental Pick
Financial statement with a calculator and a stethoscope
Given Berkshire’s size in the overall market, I think one thing that’s blatantly obvious to most investors is that only massive deals are likely to move the needle for the company.
In the grand scheme of things, this $4.3 billion investment in Alphabet is still small potatoes, considering Alphabet’s market capitalization of $3.6 trillion (works out to around 0.1% of the overall company).
That said, it’s a meaningful signal to the market that Alphabet’s underlying fundamentals are rock-solid, and its valuation hasn’t gotten ahead of its skis like many other tech stocks. With a price/sales ratio of 9.5-times (high, but not necessarily for a company with Alphabet’s margins), a forward price-earnings ratio around 27-times, and a rock-solid balance sheet, there’s a lot to like about how Alphabet is positioned relative to its Magnificent 7 peers.
It could be that Buffett and his team are playing for legacy right now. But I’m of the view that no matter how old Warren Buffett gets, he’s ultimately in this game because he absolutely loves finding deals. In his view, and that of his team, it does appear to be the case that Alphabet is now the most fundamentally sound tech stock in the market. That’s the signal the market is taking from this move, at least.