Investing with Tom checks out Warren Buffett’s Top 5 Stocks for 2022

Sky high oil prices and tight supply make oil an appealing investment.

A decade of low oil prices and ever increasing ESG concerns have caused a structural under supply of fossil fuels. Conflict in Eastern Europe has put further pressure on oil supply across Europe.

• Increased oil and gas pricing globally have made Occidental a cash printing machine in 2022.
• Occidental Petroleum is a US oil giant focused predominantly on shareholder returns through dividends, share buybacks and debt repayment.
• I suspect Buffett has a view that oil prices over the coming decade will be much higher than most people expect. Berkshire now owns over 20% of the entire company and has SEC approval to buy a lot more.
• Buffett, I’m sure, also likes the low P/E and Oxy’s focus on returning cash to shareholders.

Microsoft's proposed buyout presents the potential for shareholders to realize value

Amid management scandals, Microsoft has made an offer to buy ATVI for US$95 per share.

• Activision first appeared in the Berkshire portfolio after it was purchased by one (or both) of their smaller money managers – Todd Combs & Ted Weschler.
• Berkshire’s bet on Activision is a return to the old days of “workouts” for Buffett – a simple bet on Microsoft’s deal being approved, and shareholders capturing the spread between the current market price and Microsoft’s offer of $95/share.
• I suspect Buffett (with help from his other managers) wouldn’t mind owning the underlying business should the deal fall over too, as it has a strong track record of earnings growth.

Growing earnings makes large cap oil prices an appealing play for Berkshire Hathaway.

Chevron presents another big oil and gas bet for Buffett, and a large stock ($285b market cap) in which he can deploy a lot of cash.

• Like many oil stocks, Chevron’s earnings exploded in the last year (+709%) with high commodity prices.
• Smaller oil stocks like Vermillion Energy (NYSE:VET) and MEG Energy (TSx:MEG) in Canada trade at cheaper multiples of earnings than Chevron, however Buffett is limited to large cap stocks due to the sheer amount of money he now manages.
• As with Occidental Petroleum, I think Buffett has a view that high oil prices will sustain for longer than people expect. Analysts however expect earnings to decline over the next few years

Tech giant continues to provide solid earnings forecasts amid new product launches.

In absolute dollar terms, likely Buffett’s best investment ever, Apple shares continue to be accumulated by Berkshire in 2022.

• Apple has been a textbook great business at a fair price for Buffett.
  • Earnings are forecast to continue growing over the next few years.
  • The company generates a very high return on assets of 29.6%.
• Apple trades at a P/E of 23x, much higher than where Buffett first started buying, however he clearly still sees long term value here.

Plans for buybacks and modest valuation provide a solid rationale for Berkshire Hathaway.

After experiencing a significant COVID boom HP trades at a P/E of only 4.3x and is returning capital to shareholders via dividends and share buybacks. Buffett’s Berkshire Hathaway now owns over 10% of the company.

• Although not exactly an attractive brand, HP does produce impressive returns on capital employed of 45.4% - a solid foundation for investment.
• HP has announced plans to execute aggressive share buybacks of at least $4b in 2022, approximately 15% of their shares outstanding.
• Buffett has long been a fan of buybacks
  • They increase his per share ownership in the underlying business.
  • Buybacks can be far more tax efficient that dividend payments.
• Growth is expected to be lackluster in future as analysts expect earnings to decline from $6.3b to $3.3 over the next few years.
  • Even so, HP would still trade at only a P/E of 7.8 (without accounting for their large buyback program)
• Personally, I think Buffett sees a low risk of long-term losses due to the modest valuation and buybacks, with a chance HP could also exceed expectations and generate significant upside in the share price.