The Real Story Behind What Warren Buffett Bought and Sold in the Fourth Quarter

Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), is arguably the greatest investor alive. What's amazing about Buffett is that he doesn't need fancy machines or computer algorithms to decide which companies to buy. He simply focuses on time-tested business models with strong branding and holds onto them for extended periods of time.

Though Buffett isn't going to be right on every investment, he's been right enough over the course of his six-plus-decade career to turn his roughly $10,000 in seed capital into almost $86 billion in net worth. That's a compound annual rate of return that beats the stock market's historical rate of return, inclusive of dividends and when adjusted for inflation, by a factor of four.

Image source: The Motley Fool via Flickr.

It's time for investors' quarterly look under the hood

Because of the Oracle of Omaha's investing prowess, there's perhaps no event more exciting -- next to Berkshire Hathaway's annual shareholder meeting -- than the quarterly release of Berkshire's 13F filing with the Securities and Exchange Commission (SEC). Money managers with more than $100 million in assets under management are required to file their holdings with the SEC 45 days after a quarter ends.

Berkshire's Feb. 14 13F filing gave Wall Street and investors a look under the hood at what Buffett and his team were up to between Oct. 1, 2018, and Dec. 31, 2018. Sure, the data could be a bit old by now, given that six-plus weeks have passed since the new year began, but with a money manager like Buffett who has a tendency to buy and hold for long periods of time, the data tends to be more trustworthy than with other, more active money managers who hold hundreds of different securities.

What did Buffett's 13F show? Well, for starters, the Oracle of Omaha went back to his roots during the fourth quarter. Berkshire's buying and selling action can essentially be grouped into four categories. 

Image source: Getty Images.

1. Betting big on financials

Warren Buffett's bread and butter has always been his attraction toward financial sector companies. More specifically, Buffett tends to invest in large money-center banks and brand-name insurance companies. With few exceptions, money-center banks and insurers are cash cows that could be run with management's eyes closed, and Buffett would have it no other way.

During the fourth quarter, Buffett added another 18.9 million shares of Bank of America (NYSE:BAC), close to 14.5 million shares of JPMorgan Chase, almost 4.4 million shares of U.S. Bancorp, and a couple million shares of Bank of New York Mellon, Travelers Companies, and PNC Financial Services. In total, not counting new positions created during the fourth quarter, 6 out of the 7 share additions came from the financial sector.

2. Unloading tech stocks

Buffett, who has historically avoided the technology sector, spent the fourth quarter lightening Berkshire's exposure to the typically high-growth but volatile industry. After establishing a 41.4 million share position in Oracle in the third quarter, Berkshire disposed of its entire stake during the fourth quarter.

The Oracle of Omaha also sold just over 1% of his stake in Apple, reducing by almost 2.9 million shares, and bringing Berkshire's ownership down to 249.6 million shares. Charter Communications, which provides residential cable service, was also trimmed by over 307,000 shares, or about 4% of Berkshire's aggregate holdings in the company.

Image source: Getty Images.

3. Lightening the load on airlines

Although the industry is far from being in a tailspin, Buffett and Berkshire Hathaway continued to lighten the load on select airlines during the fourth quarter. The company's holdings in United Continental were reduced by over 4 million shares, or 15% as a whole, with Berkshire also parting ways with 1.2 million shares of Southwest Airlines, decreasing its holdings by about 2%.

During the sequential third quarter, Buffett had trimmed his stakes in American Airlines Group, Southwest Airlines, and United Continental. In other words, that's two straight quarters of share-paring for United Continental and Southwest.

4. Focusing on value

Lastly, on a broader basis, it was a return to value-stock buying for Buffett. The lone nonfinancial he added to during the fourth quarter was General Motors (NYSE:GM). The 19.8 million shares added increased Buffett's stake in General Motors by 37% to almost 72.3 million shares (about $2.4 billion in market value).

What makes General Motors so unique is that it boasts one of the smallest forward price-to-earnings ratios on Wall Street (6.1 times forward earnings). Understandably, automotive stocks often carry single-digit forward P/E ratios, but GM is currently valued modestly below its five-year average P/E ratio. When combined with a nearly 4% dividend yield, Buffett probably can't pass up the potential value.

The same could be said of Bank of America. Even with a quintupling in its share price since 2011, Bank of America's forward P/E of 10 is about 10% below its five-year average and the overall average for the financial sector. Also, as the most interest-sensitive of all money-center banks, B of A has been a big beneficiary of higher interest rates.

Image source: Getty Images.

What Buffett's 13F portends about economic growth

What's really interesting is attempting to read the tea leaves from Buffett's purchases and sells during the quarter to decipher what that might mean for the U.S. and global economy in 2019 and beyond.

Listen to any Buffett interview with a major news outlet and you'll rarely hear hints of pessimism -- and there's a good reason for that. Even though the S&P 500 has undergone 37 corrections of at least 10% since 1950, each and every one of the previous 36 corrections (not counting the current correction) has been erased by a bull market rally. Buffett knows full well that staying long and buying time-tested businesses is a much smarter path to creating wealth than trying to time the market.

Yet, there are subtle clues from Buffett's trades that he foresees a slowdown in the U.S. economy tied to actions taken by the Fed. Think about this for a moment: Higher interest rates are most immediately a positive for banks, because it allows them to pass along higher interest rates on credit cards and variable-rate loans. At the same time, businesses that are capital-intensive or rely on debt financing to grow, such as airlines and tech, respectively, don't fare as well when the cost to borrow rises.

Buffett has always been something of a hound for value stocks, but his return back to basics in the fourth quarter with purchases of GM, Bank of America, and other financial stocks, while shunning tech and airlines, suggests that Buffett is de-risking and possibly foresees higher lending rates and a slowdown in the U.S. economy from 2018s GDP growth rates.

Keeping in mind that tea-leaf reading isn't a college-endorsed course, it's nevertheless an intriguing and plausible hypothesis for investors to consider after looking under Berkshire's hood.

Hasbro Looks Forward to a Better 2019

Hasbro (NASDAQ:HAS) recently put the final wrap on 2018, reporting a forgettable holiday shopping season. Since Toys R Us went bankrupt over the summer, the toy maker's sales have struggled to move higher in spite of a healthy U.S. consumer spending lots of money (retail sales were up over 5% from 2017 according to the U.S. Census Bureau). Difficulties remain -- as indicated by the negative 9% stock performance over the last 12 months -- but a solid pipeline for the new year could mean a rebound is in store.

When kids don't get what they want

The sudden absence of Toys R Us meant Hasbro needed to double down on digital distribution, an easier-said-than-done task. It also didn't have any blockbuster movie hits during the summer months (like the Transformers franchise, which got a prequel in Bumblebee in December 2018), and partner sales with the likes of Disney (NYSE:DIS) also had an off year. With multiple headwinds converging at once, full-year results suffered.

Metric

Full-Year 2018

Full-Year 2017

YOY Increase (Decrease)

Revenue	$4.58 billion	$5.21 billion	(12.1%)
Gross profit margin	59.6%	61%	(1.4 p.p.)
Operating profit	$331 million	$810 million	(59.1%)
Earnings per share	$1.74	$3.12	(44.2%)
Adjusted earnings per share	$3.85	$5.46	(29.5%)

YOY = year over year. P.p. = percentage point. Data source: Hasbro.

To make matters worse, the company began diversifying its toy production away from China as a result of the trade spat with the U.S. That ate into profit margins, although management said it is on track to reduce its exposure to China to 60% by the end of 2020. Hasbro also had to deal with sliding sales in Europe. Management cited a report from market research group NPD that said toy and game sales fell 4% on the continent in 2018.

To put it simply, it was a bad year for the toy industry. It was the first annual industrywide sales decline since 2009 -- the year the financial crisis started to abate. Reflecting the ugly numbers -- especially during the all-important holiday shopping season -- Hasbro's stock carries a trailing-12-month price to earnings (P/E) ratio of 52. Wall Street feels optimistic, though, as the 12-month forward expected P/E is only about 19. That would indicate a dramatic rebound is in the cards.

Image source: Getty Images.

The kids are alright

Though the numbers were underwhelming, Hasbro did post some significant accomplishments. The company said it was the No. 1 toy seller on Amazon in 2018, and its online points-of-sale grew by a double-digit percentage as it shifted away from its now-defunct legacy partner. While transitioning to digital can be a painful process, it's a necessary one to survive in the digital-first world we live in (ahem, Toys R Us). The milestone paves the way for Hasbro to eventually return to growth.

The company purchased the Power Rangers in 2018, with a new TV show set for release later this year. That builds on Hasbro's history of turning popular toy brands into media assets as well, a vertically integrated franchise that capitalizes on all aspects of kids' entertainment. In a similar fashion, Hasbro wants to build on its board-game and card-game strength by bringing popular titles like Dungeons & Dragons to the video-game world. With video games only growing in popularity, management has made it clear it wants to bring more of its brands into a digital format and has promised some examples will be forthcoming.

And finally there's the partnership development pipeline, most notably at Disney. Hasbro handles all the toy production for Mickey and company, and it's shaping up to be an especially busy year for the theme park and movie studio. From Star Wars to Marvel superheroes to live-action remakes of Disney classics, Hasbro is anticipating a big rebound in toy sales from the slew of movie releases in the year ahead.

Along the road to recovery, investors will also be treated to a higher dividend payout. The board recently hiked its quarterly dividend by 8% to $0.68 per share, making for an annual yield currently at 3.1%. Though 2018 was one worth forgetting for Hasbro, adversity often spells opportunity. With a course charting a rebound in place and a decent investor payday, this stock is worth a look right now.

Why Glu Mobile Stock Gained 20.7% in January

What happened

Shares of Glu Mobile (NASDAQ:GLUU) gained 20.7% in January, according to data from S&P Global Market Intelligence. Recovery for the broader market early in 2019 and some encouraging analyst coverage propelled Glu stock to a 10-year high.

GLUU data by YCharts

Roth Capital published research on Glu in early January that analyzed performance of the company's top games and reported that bookings were better than management's guidance and most tracking guidance suggested. 

Image source: Getty Images.

So what

The video game company has posted fantastic performance over the last two years thanks to its successful pivot away from licensed games in favor of properties that it owns. Gaming industry stocks were hit hard in the late-2018 sell-off, but evidence of momentum for Glu's mobile product catalog helped the company's stock post gains of roughly 122% on the year. That run and continued gains in January made it one of the gaming industry's best-performing stocks; however, a lack of visibility into the company's upcoming lineup and uncertainty about whether its existing games will be able to increase player engagement raise questions about whether shares might be too richly valued compared to those of its more dependable industry peers. 

Now what

Glu stock has given up a bit of ground in February, with shares trading down roughly 4.5% in the month so far. 

GLUU data by YCharts

Glu stock fell after the company's fourth-quarter earnings release on Feb. 4 delivered a profit that fell short of the market's expectations. Sales for the period came in at $98.2 million, beating the average analyst estimate for revenue of $96.3 million. However, adjusted earnings per share were $0.03, missing the average analyst target for per-share earnings of $0.07.

Shares now trade at roughly 26.5 times this year's expected earnings and three times expected sales. 

T-Mobile Adds 2.4 Million New Customers

T-Mobile (NASDAQ:TMUS) reported fourth-quarter financial results on Feb. 7. The company delivered solid increases in revenue and cash production, fueled by impressive subscriber gains that once again paced the wireless industry.

T-Mobile results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue	$11.445 billion	$10.759 billion	6.4%
Adjusted EBITDA	$2.97 billion	$2.711 billion	9.6%
Free cash flow	$1.22 billion	$1.137 billion	7.3%

Data source: T-Mobile Q4 2018 earnings release. EBITDA = earnings before interest, taxes, depreciation, and amortization.

What happened with T-Mobile this quarter?

T-Mobile added 2.4 million net new customers, including 1.4 million postpaid subscribers, who pay monthly bills and are generally the most-sought-after customers for wireless carriers. 

Impressively, T-Mobile led the industry in terms of both postpaid phone net additions (1 million) and prepaid net additions (135,000) in the fourth quarter. Notably, the postpaid phone figure significantly exceeded that of industry leader Verizon (NYSE:VZ), which added 653,000 postpaid phone net subscribers in its most recent quarter. 

T-Mobile's customer growth is outpacing its rivals. Image source: Getty Images.

T-Mobile is also getting better at retaining its existing customers. The carrier's branded postpaid phone churn rate improved 19 basis points year over year to 0.99% in the fourth quarter, continuing a positive trend that's seen T-Mobile narrow the gap with Verizon over the past year in terms of this important metric. 

This powerful combination of subscriber gains and improved retention is helping to drive solid increases in T-Mobile's revenue and earnings. In all, revenue rose 6% to $11.4 billion, while EBITDA -- adjusted to exclude stock-based compensation and certain other items -- jumped 10% to $3 billion.

Moreover, T-Mobile's cash generation remains robust. Operating cash flow climbed 10% to $954 million, and free cash flow increased 7% to $1.2 billion.

Looking forward

T-Mobile issued its operating and financial outlook for 2019. The company expects to add between 2.6 million and 3.6 million branded postpaid customers and deliver adjusted EBITDA of $12.7 billion to $13.2 billion.

CEO John Legere also provided an update on the progress of T-Mobile's pending merger with Sprint (NYSE:S) during a conference call with analysts. Legere highlighted some of the proposed benefits of the deal, saying:

The combined company will create an aggressive competitor in wireless broadband and beyond, which will result in lower prices for consumers and will create jobs starting on day one. American consumers will benefit from a nationwide 5G network that is both broad and deep.

Legere noted that T-Mobile and Sprint are entering the final stages of their regulatory review process. The companies are hopeful that the deal will be approved later this year. "And we can't wait to get started," Legere said.

LADENBURG THALM/SH SH Downgrades Avadel Pharmaceuticals (AVDL) to Neutral

Avadel Pharmaceuticals (NASDAQ:AVDL) was downgraded by analysts at LADENBURG THALM/SH SH from a “buy” rating to a “neutral” rating in a report released on Friday, Marketbeat.com reports.

A number of other equities analysts have also commented on the company. ValuEngine lowered Avadel Pharmaceuticals from a “hold” rating to a “sell” rating in a research note on Wednesday, December 26th. Laidlaw lowered Avadel Pharmaceuticals from a “buy” rating to a “hold” rating and set a $6.00 price objective for the company. in a research note on Tuesday, November 6th. Finally, Zacks Investment Research raised Avadel Pharmaceuticals from a “sell” rating to a “hold” rating in a research note on Monday, January 7th. One research analyst has rated the stock with a sell rating and six have given a hold rating to the company’s stock. Avadel Pharmaceuticals has an average rating of “Hold” and an average price target of $6.42.

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Shares of Avadel Pharmaceuticals stock opened at $2.26 on Friday. Avadel Pharmaceuticals has a 12 month low of $1.69 and a 12 month high of $9.98. The company has a market cap of $93.64 million, a P/E ratio of 7.29 and a beta of 1.86. The company has a debt-to-equity ratio of 1.74, a current ratio of 3.15 and a quick ratio of 3.02.

Several large investors have recently bought and sold shares of AVDL. Brandes Investment Partners LP lifted its stake in shares of Avadel Pharmaceuticals by 27.5% in the 3rd quarter. Brandes Investment Partners LP now owns 6,335,548 shares of the company’s stock valued at $27,813,000 after purchasing an additional 1,365,442 shares during the last quarter. Fosun International Ltd bought a new stake in shares of Avadel Pharmaceuticals in the 4th quarter valued at approximately $826,000. Morgan Stanley lifted its stake in shares of Avadel Pharmaceuticals by 61.2% in the 3rd quarter. Morgan Stanley now owns 777,272 shares of the company’s stock valued at $3,412,000 after purchasing an additional 295,036 shares during the last quarter. Renaissance Technologies LLC lifted its stake in shares of Avadel Pharmaceuticals by 34.2% in the 2nd quarter. Renaissance Technologies LLC now owns 1,049,070 shares of the company’s stock valued at $6,431,000 after purchasing an additional 267,270 shares during the last quarter. Finally, Janney Montgomery Scott LLC lifted its stake in shares of Avadel Pharmaceuticals by 14.8% in the 3rd quarter. Janney Montgomery Scott LLC now owns 227,573 shares of the company’s stock valued at $999,000 after purchasing an additional 29,350 shares during the last quarter. 52.98% of the stock is owned by institutional investors and hedge funds.

About Avadel Pharmaceuticals

Avadel Pharmaceuticals plc develops and commercializes pharmaceutical products primarily for treating urology and sleep medicines in the United States, France, and Ireland. Its commercial products that are used in the hospital setting include Bloxiverz, a drug used in the operating room for the reversal of the effects of non-depolarizing neuromuscular blocking agents after surgery; Vazculep, a phenylephrine hydrochloride injection that is used for the treatment of hypotension occurring in the setting of anesthesia; and Akovaz, an ephedrine sulfate injection for treating hypotension, as well as Noctiva for treating nocturia due to nocturnal polyuria.

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