New evidence strongly suggests that this is the “secret stock” that Warren Buffett has been buying

For nearly 60 years, Berkshire Hathaway (BRK.A 0.92%) (Brk.b 0.34%) CEO Warren Buffett has captured the attention of professional and retail investors by walking around Wall Street several times. Since becoming CEO in the mid-1960s, he has overseen a total return of 4,938,103% in his company's Class A shares (BRK.A), as of the closing bell on March 14. For comparison's sake, this is 146 times larger. of the total gross return Standard & Poor's 500Including dividends paid during the same period.

Although the affectionately named “Oracle of Omaha” won't be right all the time, his track record suggests he has a knack for finding value hiding in plain sight. That's why investors are eagerly awaiting Berkshire Hathaway's Form 13F filings with the Securities and Exchange Commission (SEC).

Berkshire Hathaway's 13F is a powerful tool for investors

A 13F is a filing required every quarter for institutional money managers who oversee at least $100 million in assets under management. As of March 14, Buffett and his team had $366 billion in invested assets spread across 45 stocks and two index funds.

What makes 13Fs valuable is that they allow investors to see what the brightest and most successful money managers on Wall Street have been buying, selling and holding. These recordings can provide valuable information about stocks and trends that are of interest to major investors on Wall Street.

For example, Berkshire Hathaway's 13Fs showed that Warren Buffett and his investment assistants, Todd Combs and Ted Weschler, were actively adding to their positions in two energy stocks: Chevron (CVX -0.10%) And Occidental Petroleum (oxy 0.11%). Although energy stocks have not historically represented a large percentage of assets invested in Berkshire, the combination of Chevron and Occidental makes up roughly 10% of the aforementioned $366 billion portfolio.

Having this much capital to work in two complementary oil and gas stocks is a very clear message that the brightest minds at Berkshire Hathaway expect the spot price of oil to remain above historical norms, if not trend higher. Years of underinvestment in capital during the COVID-19 pandemic have left global oil supplies tight, helping to push up the spot price of crude.

The ability to track the investments Warren Buffett makes has allowed investors to ride his coattails for potentially life-changing returns.

New evidence is emerging about the “secret stocks” Warren Buffett is buying

However, Berkshire Hathaway's 13F doesn't tell the whole story in more ways than one. In addition to Warren Buffett's company having a “secret” portfolio worth $621 million, Berkshire Hathaway has also been granted an SEC exemption for confidential treatment with respect to one or more of its holdings.

In other words, Buffett and his team are building a position in one or more companies, and they don't want to be out of the bag while they're doing it. Since investors tend to accumulate stocks bought by Buffett and his lieutenants, this secret transaction potentially allows Berkshire to build its stake on a lower-cost basis.

Berkshire's last two quarterly 13Fs came with this secret treatment revelation, meaning the Omaha oracle and his lieutenants were buying shares of the stock, or multiple shares, perhaps from July to December. Although I've previously thrown a dart at the mystery stock this might be, new evidence points to a very specific company as Warren Buffett's “Secret Stock.”

While there are literally thousands of publicly traded companies that Buffett could, in theory, put his money to work in, there are three pieces of evidence that quickly narrow the field. First, we can examine the amount Berkshire Hathaway spent on purchasing securities during the third and fourth quarters and compare that number to the approximate value of shares purchased during those quarters, as listed in Berkshire's 13Fs. To the extent of $5 billion of securities purchases not accounted for on a combined basis during the second half of 2023.

What's interesting about this number is that Berkshire Hathaway will be required to file with the Securities and Exchange Commission (SEC) once it reaches at least a 5% stake in a publicly traded company. Since there is currently no filing, this suggests that the company that Buffett and his team are secretly buying has a market capitalization of $100 billion or more. This eliminates all but 120 publicly traded companies in the United States

Second, Berkshire Hathaway's fourth-quarter operating results show that the company's cost base for securities held in “banking, insurance and finance” grew by $2.38 billion to $27.14 billion compared to the quarter ended September. This cost base has grown despite the rise in Buffett & Co.'s prices. Selling shares in insurance companies Markel Group And Globe Live. This is what my idiot colleague Adam Levy pointed out a couple of weeks ago, which ensures that Buffett's secret stocks come from the financial sector.

There are only 24 stocks with a market cap of $100 billion or more found in the financial sector.

The third piece of evidence is that Warren Buffett loves a good deal and will stubbornly sit tight until he gets one. This means that any stock with a relatively high price-to-earnings (P/E) ratio is off the table. Setting the maximum P/E at 15 reduces the number of candidates to only 13.

Image source: Getty Images.

This is the secret stock that Berkshire Hathaway is most likely to buy

Among the remaining thirteen financial stocks are a few companies that Berkshire already owns, including… American bank, American ExpressAnd Citigroupin addition to companies that have been sold within the past few quarters or years, such as C. B. Morgan Chase, Goldman SachsAnd Wells Fargo. It is highly unlikely that Buffett will return to JPMorgan Chase, Goldman Sachs, or Wells Fargo on a confidential basis, and we would see buying activity via 13F if the three former stocks Berkshire currently owns.

This leaves seven possible options:

• Morgan Stanley (Ms -0.81%)
• HSBC Holdings
• Royal Bank of Canada
• Mitsubishi UFJ Financial Group (MUFG -0.88%)
• Toronto Dominion Bank
• Chubb
• UPS Group

After following Buffett's business activity for a long time, I can't remember a time when he showed much, if any, interest in Canadian banks. Moreover, although the Oracle of Omaha is willing to move forward with a land reclamation project in the United States (e.g., Bank of America in 2011), European banks are not his cup of tea. This will likely exclude HSBC, UBS, Toronto Dominion and Royal Bank of Canada from the discussion.

Taking it a step further, Berkshire's investment team has just purged its portfolio of Markel and Globe Life, which means there's probably not as much appetite to join an international insurer like Chubb.

This leaves two companies that meet what Warren Buffett is looking for: Morgan Stanley and Mitsubishi UFG Financial Group, known as “MUFG.”

Morgan Stanley cannot be ruled out as a potential “secret” purchase of Berkshire. It is worth 12 times forward year's earnings and generates a significant portion of its sales and profits from the company's wealth management division. In theory, wealth management should help insulate Morgan Stanley from the inevitable down cycles in the US and global economy.

But the financial stock that makes the most sense for Buffett and his team to buy secretly is MUFG.

In Warren Buffett's recent annual letter to shareholders, he described the small group of companies he values ​​as core holdings that will be held “indefinitely.” while coca cola American Express and unsurprisingly on the list, the Oracle of Omaha promoted Occidental Petroleum and the five Japanese trading houses — Mitsubishi, Mitsui, Itochu, SumitomoAnd Marubeni -As companies he will never sell. In fact, Buffett increased his company's stake to about 9% in each of these Japanese trading houses. Berkshire's investment team has made no secret of its belief that the Japanese economy can outperform in the long term.

MUFG is the largest bank by assets in Japan. Importantly, it trades at a reasonably low P/E ratio of less than 12, and is valued modestly below its reported book value. High-quality banks trading below their book value were often a lure for Buffett. Comparatively, Morgan Stanley's value is about 60%. above Its book value.

Moreover, MUFG has actually been riding the coattails of Morgan Stanley to its massive profits since the financial crisis more than 15 years ago. Mitsubishi UFJ Financial Group bought $9 billion worth of preferred stock in Morgan Stanley after the collapse of Lehman Brothers. This stake in Morgan Stanley has generated between 30% and 40% of MUFG's annual profits in recent years.

Why buy Morgan Stanley shares when Buffett can get exposure to Morgan Stanley via Mitsubishi UFJ Financial Group at a fraction of the cost? I strongly believe MUFG is the secret stock that Warren Buffett is buying in Berkshire Hathaway.