- Warren Buffett's Berkshire Hathaway invested in drugmakers, exited Costco, dumped several bank stocks, and bought back a record $9 billion of stock last quarter.
- Dr John Longo — a finance professor, portfolio manager, and the author of the upcoming "Buffett's Tips: A Guide to Financial Literacy and Life" — explained those decisions to Business Insider.
- "Buying companies with a durable, competitive advantage, or moat, is central to Buffett's investment philosophy," Longo said about Berkshire's purchase of pharmaceutical stocks.
- "The market is still valuing Berkshire like a financial stock due to its sizeable insurance unit, but its mix of businesses likely deserves a higher valuation," he said about Buffett's buybacks.
- Visit Business Insider's homepage for more stories.
Warren Buffett's Berkshire Hathaway surprised many followers by plowing more than $5 billion into pharmaceutical stocks, selling its Costco stake, and slashing bank holdings including JPMorgan and Wells Fargo last quarter.
The famed investor's company likely invested in AbbVie, Bristol Myers Squibb, Merck, and Pfizer because drugmakers are among the few US stocks trading at enticing valuations, Dr John Longo, author of the upcoming "Buffett's Tips: A Guide to Financial Literacy and Life," told Business Insider this week.
Buffett and his team placed the bets before Joe Biden won the US presidency. Yet they may have considered the prospect of increased healthcare spending during a Biden administration, said Longo, a finance professor at Rutgers Business School and the investment chief of wealth manager Beacon Trust.
Moreover, pharmaceutical companies stand to benefit from aging populations in developed nations and burgeoning demand for healthcare in developing countries, he continued. They are also protected from competition by patents, the high costs of researching and developing drugs, and their relationships with doctors and hospitals, Longo added.
"Buying companies with a durable, competitive advantage, or moat, is central to Buffett's investment philosophy," he said.
Buffett is shifting his focus
Berkshire's exit from Costco after more than 20 years was unexpected given the big-box retailer's "extremely strong fundamentals," Longo said.
He suggested Costco's aggressive valuation of about 40 times forward earnings, and its domestic bias leaving it relatively more exposed than rivals to a corporate tax hike under President Biden, may have factored into the decision. The potential for greener grass might also explain it.
"I believe Buffett thinks the money could be put to better use elsewhere, rather than any problems with Costco," Longo told Business Insider.
Berkshire selling nearly all of its JPMorgan shares was another shock to Longo as one of Buffett's deputies, Todd Combs, sits on the bank's board. Buffett is also a longtime admirer of JPMorgan CEO Jamie Dimon, and personally owned shares in his company in 2012.
The risk of a flat yield curve and near-zero interest rates weighing on JPMorgan's profits for the next few years may have spurred Berkshire to sell, Longo said. The financial sector could also face stricter regulations with Biden in the Oval Office, he continued.
Betting on Berkshire
One of Berkshire's biggest moves last quarter was buying back a record $9 billion of its own stock. Buffett probably approved those repurchases because he viewed his company's shares as undervalued, and saw them as a compelling use for Berkshire's vast cash reserves, Longo said.
The author, portfolio manager, and university professor pointed out that Berkshire trades at a small premium to its net assets, despite owning a raft of energy companies, railways, and other businesses that typically trade at multiples of book value.
"The market is still valuing Berkshire like a financial stock due to its sizeable insurance unit, but its mix of businesses likely deserves a higher valuation," Longo said.
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