This Is Warren Buffett's No. 1 Stock to Buy (and You Won't Find It in Berkshire Hathaway's Portfolio)

For nearly six decades, Berkshire Hathaway (BRK.A 0.32%) (BRK.B 0.41%) CEO Warren Buffett has put on a clinic and run circles around the benchmark S&P 500. When 2021 came to a close, the aggregate return of Berkshire’s Class A shares (BRK.A) since the Oracle of Omaha became CEO in 1965 — a cool 3,641,613% — was 120 times greater than the total return, including dividends paid, of the S&P 500 (30,209%) over the same stretch.

Buffett’s long-term outperformance has earned him quite the following. Both new and tenured investors have ridden his coattails to sizable gains — and it’s all thanks to 13Fs.

A 13F is a required quarterly filing by money managers and ultrawealthy individuals with over $100 million in assets under management. It effectively allows investors to see what the smartest minds on Wall Street were buying, selling, and holding in the latest quarter. Since Berkshire Hathaway has $345 billion in invested assets, it most definitely is required to file a 13F no later than 45 days after the end of the previous quarter.

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

Berkshire Hathaway’s 13Fs clue investors into many of Buffett’s top buys

Investors who’ve followed Berkshire’s 13Fs are well aware that the Oracle of Omaha and his investing lieutenants (Todd Combs and Ted Weschler) have been busy bees during the bear-market decline.

For example, Berkshire’s 13Fs show a steady build in energy stocks since late 2020. Over the past two years, Chevron (CVX -1.37%) has grown into Berkshire’s third-largest holding by market value ($29.5 billion). Meanwhile, Buffett and his team purchased more than 194 million shares of Occidental Petroleum (OXY -1.62%) in 2022 — a position now worth $12.6 billion. This stake comes atop the $10 billion in Occidental preferred stock Buffett’s company has owned since 2019.

Warren Buffett’s seemingly newfound love for energy stocks suggests that crude oil prices will remain elevated for the foreseeable future. Three years of capital underinvestment due to the COVID-19 pandemic will assuredly constrain supply as demand picks up. Add to this Russia’s invasion of Ukraine and the supply question marks this creates for Europe, and a very clear bull case can be made for Chevron’s and Occidental’s upstream drilling operations.

Berkshire Hathaway’s 13Fs also show considerable love for tech stock Apple (AAPL 3.71%), which is far and away the largest holding in the portfolio. Apple accounts for more than 38% of invested assets because it’s viewed as the most valuable brand on the planet, has an exceptionally loyal customer base, and has used its innovative capacity to grow its sales and profits. As a larger percentage of Apple’s revenue shifts to subscription services, we should see improved operating margins and less in the way of sales fluctuations during iPhone replacement cycles.

Apple is also a capital-return kingpin. It’s doling out $14.6 billion in dividend payments annually and has repurchased $554 billion worth of its common stock over the trailing decade. (For what it’s worth, Chevron also recently announced plans to buy back up to $75 billion of its common stock.) Buffett and his team have always favored brand-name businesses with sizable capital-return programs.

Image source: Getty Images.

You won’t find Warren Buffett’s favorite stock to buy in Berkshire Hathaway’s portfolio

While Berkshire Hathaway’s 13Fs have made clear that the Oracle of Omaha and his investment team favor companies like Apple, Chevron, and Occidental Petroleum, they don’t tell the complete story.

On a combined basis, Buffett has spent in the neighborhood of $54 billion purchasing shares of Apple and Chevron since the beginning of 2016. But since July 2018, Warren Buffett and executive vice chairman Charlie Munger have OK’d the purchase of $63.1 billion worth of another stock that simply isn’t going to be found in Berkshire Hathaway’s 13F or in its investment portfolio. You will, however, find evidence of this aggressive buying activity in Berkshire Hathaway’s quarterly earnings report.

This mystery company that’s unquestionably Warren Buffet’s No. 1 stock to buy is none other than the Oracle of Omaha’s and Munger’s own company, Berkshire Hathaway. Go ahead and cue that plot-twist music.

Prior to July 17, 2018, Buffett and Munger were only able to repurchase shares of Berkshire Hathaway stock if its share price was no more than 20% above book value. For more than half a decade, the company’s stock never fell to this level, which meant no capital could be deployed for buybacks.

However, new rules were put into place in July 2018 that gave Berkshire Hathaway’s dynamic duo more leeway to act on buybacks. As long as the company has $30 billion in combined cash and U.S. Treasury bonds in its coffers and both Buffett and Munger agree Berkshire Hathaway shares are trading below their intrinsic value, Berkshire Hathaway’s Class A and B stock can be bought back without a cap. In a little over four years, $63.1 billion worth of Berkshire Hathaway stock has been repurchased.

For businesses that generate steady or growing net income, the biggest advantage of buying back stock is that a reduced outstanding share count has a tendency to lift earnings per share (EPS). Higher EPS can lower a publicly traded company’s price-to-earnings ratio and make it more fundamentally attractive to investors.

Plowing more than $63 billion into buybacks is also Warren Buffett’s not-so-subtle way of telling the investing community that he’s confident his company’s long-term operating strategy will continue to be successful. This includes acquiring predominantly cyclical businesses, as well as investing in generally profitable, brand-name companies, many of which pay a dividend. With Berkshire Hathaway’s investment portfolio well positioned to take advantage of disproportionately long periods of economic expansion, Buffett and his team should continue outperforming the S&P 500.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.