The ‘Hidden’ Sector Warren Buffett is Buying

The ‘Hidden’ Sector Warren Buffett is Buying
  • Aussie investors cash in on dividends
  • What Warren Buffett’s latest shareholder letter reveals
  • Plus, take note of these strategic acquisitions

A few investors will be wondering what to do with all the money due to spew into their bank accounts shortly.

Aussie stocks are set to pay out $37 billion in dividends. The Weekend Australian says cash payouts from the top 20 stocks have increased 20%.

There’s more than one Australian retiree who will look at that figure with a tinge of desire if they’re too heavily invested in cash.

Perhaps that’s why the Aussie market is quickly regaining ground from the ‘big’ selloff in early February. The bargain hunters are stepping in.

For all the dramatic headlines and commentary that happened a couple of weeks ago, know this: The ASX 200 has not had a down day since 9 February. That’s a sign of strength. We now have a strong lead from Wall Street to start the week, too…

The Oracle of Omaha steers away from one sector in particular

Presumably, Warren Buffett would be proud of any investor who bought the recent dip.

He’d love nothing more than for the US stock market to tank in a major way. Why? To go shopping, of course!

The Oracle of Omaha released his annual letter on the weekend. Buffett is in a pretty happy place right now. Trump’s tax cuts in the US gave his company, Berkshire Hathaway, a US$29 billion gain in net worth. That accounted for 44% of Berkshire’s total rise for last year.

But all is not rosy for Buffett. The latest numbers show that he has an astonishing US$116 billion in cash. The cash pile is so enormous that even he’s not sure what to do with it. Buffett told us why: Stocks are too expensive.

You could say that having too much money is a good problem to have. And it is. But Buffett’s firm is so huge now that the investing landscape gets smaller as his account gets bigger.

This is probably part of the reason why Berkshire’s young chiefs have been accumulating Apple shares, despite Buffett’s aversion to technology firms in general. The tech companies are big enough to absorb his kind of cash.

This dilemma is not going to go away for him, either. Because we can be sure of one place that Berkshire’s cash hoard is not going to go: The long-term bond market.

Buffett knows perfectly well that putting huge slabs of cash into the fixed-income market is a losing proposition from here.

We can tell this from the maturity of the US Treasuries that Berkshire does own — only 88 days. That means Buffett is simply rolling over his cash and waiting things out while interest rates move higher.

Get it? The man with the biggest finger on the pulse of the US economy sees growth and inflation ahead.

You should be making the same assessment…and buying stocks to take advantage of it.

I reckon we can guess where he’s seeing the biggest potential growth, too…

Buffetts big bet on middle America

Here’s the other interesting about Berkshire Hathaway right now: Five of its top 15 equity holdings are banks. That’s a pretty clear indication that Buffett thinks the US is going to see a credit expansion, and financials should benefit.

It could also be read as Buffett making some kind of strategic play on one industry in particular.

We’ve just noted that he has the financiers on his books…but look at the businesses Berskhire Hathaway has added in the last 12-18 months.

One Berkshire subsidiary, Clayton Homes, bought two other conventional home builders….and could take the volume of total construction between the three builders to US$1 billion for the year. Buffett also bought a floor covering business.

Also, through a series of acquisitions and growth, Buffett now has nearly 41,000 real estate brokers underneath him…with 3% of the total US market.

Is it just me or is Buffett making a massive bet on US housing?

I could be wrong, of course. There’s nothing to suggest so in anything he says directly. But Buffett is famous for always concentrating his resources on North America in general. Foreign stocks are not for him, usually.

There’s one major exception to that: His holding in BYD Company. It’s Berkshire Hathaway’s fifth largest direct equity investment. It also happens to be a Chinese car maker that specialises in rechargeable batteries and electric vehicles.

Buffett bets big on America, and never fails to remind everyone that the country, and the US stock market, will flourish over time.

We also know that Buffett likes backing simple investment cases, steady demand, and long-term trends. The demographics in America suggest US real estate is going to be a fruitful place for businesses for years.

The crisis of 2008 meant the US underbuilt housing for years. The millennial generation coming through is the largest demographic cohort in the country.

Buffett may not live to see it all play out, but it looks to me like he’s building Berkshire to take advantage of it for the decade to come.


Callum Newman Signature

Callum Newman
Editor, The Daily Reckoning Australia