The only stock Warren Buffett has sold in each of the last 2 bear markets

When it comes to making money, few fund managers can match billionaire Warren Buffett. Since becoming CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965, he created nearly $590 billion in value for his shareholders and generated an aggregate return of more than 3,600,000% for his company’s Class A shares (BRK.A). That’s an average annual return of 20.1%, through December 31, 2021, for those of you keeping score at home.

In other words, riding in the wake of the Oracle of Omaha for big wins is an investment strategy that’s been proven for decades.

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

Bear markets are usually an excuse for Warren Buffett to shop

The good news for investors is that it’s pretty easy to track Buffett’s every move. Investment funds and high net worth individuals with more than $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission within 45 days of the end of a quarter.

A 13F offers a glimpse under the hood of what Wall Street’s brightest and most successful minds have bought, sold and owned over the past quarter. While the 13Fs have their flaws, such as being at least six weeks backward, they can help identify trends and actions that pique the interests of successful fund managers. Because Berkshire Hathaway has an investment portfolio exceeding $300 billion in market value, it is absolutely necessary to file a 13F each quarter.

As you can imagine, the Oracle of Omaha has been something of a busy bee as stock market valuations have plunged. During the first half of 2022, Buffett deployed tens of billions of dollars to buy or add to more than a dozen stocks. Considering that Buffett takes a very long-term view when investing in stocks, it’s not at all surprising to see him aggressively putting Berkshire Hathaway money to work during major downturns.

The only stock the Oracle of Omaha has cut in each of the last two bear markets

Interestingly, however, bear markets were also a time when Buffett and his investment team reduced their exposure to certain companies or industries. It happened during the coronavirus crash of 2020, when Berkshire Hathaway cut or sold out more than a dozen stocks, and it happened again, albeit to a lesser extent, in the first half of 2022.

Among this selling activity over the last two bear markets, there is one constant: auto stocks General Engines (NYSE:GM).

During the brief bear market of 2020, Berkshire Hathaway sold 319,000 shares of GM, reducing its existing stake by less than 1%. Although Buffett’s company added just over 2 million shares to its position in GM during the first quarter of 2022, it ultimately sold nearly 9.17 million shares in the quarter ending June. On a net basis, Berkshire Hathaway has reduced its stake in GM by 7,122,641 shares since the start of 2022.

Why sell General Motors stock? Although Buffett is known for packing his investment portfolio with cyclical companies and not caring too much about when bear markets and recessions will occur, it’s hard to ignore the multiple headwinds the auto industry is facing. confronted. Semiconductor chip shortages have caused automakers to scale back or halt production of some models. Additionally, parts shortages and supply chain challenges related to COVID-19 domestically and in China have made it difficult to simply maintain production.

Historically high inflation is a problem for General Motors and its peers. A combination of higher input costs and workers with more wage bargaining power means a tough choice has to be made. Automakers can either absorb some of these cost increases and hurt their margins, or raise prices and cause some potential buyers to give up on a new car.

To add to this point, rapidly rising interest rates are bad news for potential buyers looking to finance their purchase. As the Federal Reserve focuses on containing historically high inflation, the cost of borrowing is only rising. When combined with higher input costs, it’s a recipe for consumer sticker shock.

An all-electric GMC Hummer crossing a very shallow river.

The GMC Hummer EV is one of 30 electric vehicles that GM plans to launch by the end of 2025. Image source: General Motors.

Could Warren Buffett be (gasp!) Wrong?

It is certainly possible that a cyclical company like General Motors could see reduced demand for new vehicles if the US and global economy continues to weaken. But Berkshire Hathaway cutting its stake in a clear value stock begs the question, “Could Warren Buffett be wrong?”

To be fair, all investors are fallible, and the Oracle of Omaha has had its fair share of bad investments and bad trades. Although Berkshire still holds nearly 52.9 million shares of GM in its investment portfolio, I think reducing its stake will prove to be a regrettable decision.

For much of the past two decades, General Motors has been looking for an organic spark — and it finally has it. The electrification of private and business fleets offers an opportunity for organic growth over several decades. As most developed countries commit to reducing their respective carbon footprints, encouraging electric vehicle (EV) sales at the consumer and business level is a no-brainer.

For its part, General Motors plans to invest a total of $35 billion through 2025 to develop and launch electric vehicles, autonomous vehicles and battery factories. CEO Mary Barra expects her company to launch 30 electric vehicles globally by the end of 2025, and generate $50 billion in annual electric vehicle sales in North America by the middle of the year. decade. Ultimately, Barra believes General Motors could produce 2 million electric vehicles in North America and China by 2025.

The beauty of selling electric vehicles is twofold. First, as noted, this is a long-lasting replacement cycle. That should provide consistent and historically above-average sales growth for GM and its peers. Second, electric vehicles have the potential to generate higher margins on vehicles compared to internal combustion engine vehicles. As production processes become more refined over time, EV margins could be surprisingly juicy for traditional producers like General Motors.

Don’t discount GM’s existing presence in China, either. This is a company that has delivered approximately 2.9 million vehicles to the world’s No. 1 automotive market in consecutive years. Having an established brand in the nascent electric vehicle market in China could see General Motors become a key player.

Even the most bearish of the 19 Wall Street analysts covering GM still expect it to produce nearly $4 in earnings per share in 2023 under tough conditions. This bottom-of-the-barrel forecast puts General Motors at a forward price-to-earnings ratio of 8, which is still historically cheap given its longer-term growth prospects.

10 stocks we like better than General Motors
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and General Motors wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of September 30, 2022

Sean Williams has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Comments are closed.