Latest filing reveals Berkshire Hathaway has established new positions in large-cap pharmaceutical stocks AbbVie, Bristol Myers Squibb, Merck, and Pfizer. He also created new positions in T Mobile (NASDAQ: TMUS) and Snowflake (NYSE: SNOW). Are these stocks worth adding to your portfolio? Here’s why Buffett might be a fan of these companies.
A bet on Biden or against the economy?
Warren Buffett’s interest in healthcare companies suggests he believes demand for healthcare will increase under a Biden presidency, but this may also reflect growing angst over economic gloom caused by the COVID resurgence -19.
Joe Biden wants to expand the Affordable Care Act, a law that allows about 20 million Americans to have health insurance. However, Biden also wants to give Medicare the ability to negotiate lower drug prices from manufacturers, which could offset favorable winds associated with insuring more people. In addition, the Supreme Court is currently seized of the latest Obamacare challenge; its decision is not expected until next summer. If the court sides with the plaintiffs, the roles of health insurance could diminish.
Warren Buffett’s bet on health may be less about election results and more about fears that the US economy will stumble if forecasts of a COVID-19 resurgence prove correct. Sadly, newly diagnosed COVID-19 cases are accelerating and hospitalizations due to COVID-19 are increasing similarly. An increase in the positivity rate, or the percentage of positive cases on all tests, prompted New York City to halt in-person teaching this week, suggesting a return to more stringent requirements.
If things don’t improve, businesses could shut down, sparking unemployment and a corresponding drop in economic activity. In such a scenario, having pharmaceutical stocks might make sense, as the demand for medicines is less sensitive economically than the demand for other goods or services.
|New Berkshire Hathaway Pharmaceutical Shares|
|Business||Purchased shares||Current value|
|Bristol Myers Squibb (NYSE: BMY)||29,9 millions||$ 1.81 billion|
|AbbVie (NYSE: ABBV)||21,3 millions||$ 1.86 billion|
|Merck (NYSE: MRK)||22,4 millions||$ 1.86 billion|
|Pfizer (NYSE: PFE)||3,7 millions||$ 136 million|
Warren Buffett’s decision to buy Bristol Myers Squibb, AbbVie, Merck and Pfizer may also have been supported by their relatively favorable valuation. All four had forecast price-to-earnings ratios that were close to their lowest level in 10 years earlier this year, and none currently have a forecast P / E ratio above 15.
Bristol Myers Squibb is the only one of the four to have operating margins below 25%. Its operating margin is only 9%, but it has a lot of irons in the fire that could improve results in the future, including the potential approval next year of a multiple myeloma drug for the. new generation cancer to which he subscribed Bluebird bio.
Arguably AbbVie is the cheapest stock in the bunch. It has the lowest price / sales, free cash flow, and price / earnings as its bestseller, Humira, could see sales plummet due to competition from generics. This risk does not appear to concern Berkshire Hathaway, however. This could be because AbbVie is managing its Humira risk by cutting licensing agreements with drug makers to control generic drug launches.
There are also good reasons to own Merck. Its cancer drug, Keytruda, generated more than $ 10 billion in revenue in the first nine months of 2020, up 30% year-over-year. Sales could also continue to grow, as there are a multitude of combination trials underway that could allow Keytruda to gain approval in more indications.
Pfizer is now perhaps the most intriguing of the four. This week, he claimed his COVID-19 vaccine was 95% effective, positioning it as one of the first companies to gain approval from the Food and Drug Administration. If approved, its vaccine could add billions of dollars to its sales over the next year as Pfizer and its partner, BioNTech, have already reached a $ 1.95 billion deal to deliver 100 million doses to the US government, with an option for an additional 500 million doses.
Warren Buffett’s Berkshire Hathaway also took ownership of 2.4 million T-Mobile shares in the last quarter. The stake – worth around $ 275 million at the time of writing – is relatively small, suggesting the buying decision was likely made by Buffett’s co-directors Todd Combs. and Ted Weschler.
In April, T-Mobile finalized its merger with Sprint to become the second-largest wireless operator in the United States. Since Sprint and T-Mobile have many overlapping assets, management estimates they can unlock $ 43 billion in savings after the merger, significantly increasing free cash flow. In addition, investments in its next-generation 5G network could allow it to go beyond wireless to potentially compete with cable companies for Internet services.
Unlike its peers, T-Mobile doesn’t pay a dividend (yet), but it’s profitable and the only one of the Big Three to be pure wireless gaming. AT&T owns multimedia assets like WarnerMedia, the owner of HBO. Verizon offers fiber optic cable and telephone services and has multimedia properties, including Yahoo!
A home run for an IPO
Finally, Berkshire Hathaway also took advantage of a hot new issue market by signing to buy $ 250 million shares of cloud software Snowflake, his darling, when it went public in September.
Providing data storage and analytics software to more than 3,000 companies worldwide, Snowflake’s initial public offering, or IPO, was one of the most anticipated this year. The company’s sales jumped 121% year-over-year to $ 133 million in the second quarter due to an impressive 158% net retention rate, a measure of customer sales existing compared to the previous year.
Despite its growth, Snowflake only works with 146 Fortune 500 companies, which suggests that there are many more avenues to grow its business. Thanks to its potential to gain more clients, its shares soared to over $ 260 per share from its offering price of $ 120, giving Berkshire Hathaway a big win in just over two months. It remains to be seen if Snowflake stays in his wallet, however. Historically, Warren Buffett has avoided tech stocks in favor of easier-to-understand companies.