When the going gets tough, the tough... break out their checkbooks? After seeing stocks crater this summer, this is precisely what Warren Buffett did through his investment firm Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Buffett and his team invested $7 billion in the third quarter. To put that in perspective, that's more than twice the amount of buying he did just a quarter earlier and nine times the amount he bought in the first quarter. You'd have to go back to the late 1990s to find the last time Buffett was so aggressive. (Back then, a global currency crisis led by the Thai baht and the Russian ruble put a temporary scare in more faint-hearted investors.)
The fact that stocks have been on the upswing since the fourth quarter that began in October tells you Buffett has already scored with his big buying spree. The question for the rest of us is precisely what holds appeal to Buffett and his team right now, and how should this affect your next moves? Let's take a look...
What else kept Buffett and his team busy these past few months? Well, there are some clear "Buffett-style" picks along with some that will make investors scratch their heads. For example, Berkshire Hathaway bought roughly $175 million of defense contractor General Dynamics (NYSE: GD). This is where I have to respectfully disagree with the Oracle of Omaha. As I noted recently, a looming possible decision to terminate production of new Abrams tanks is just one of many potential headaches for General Dynamics. The stock may seem inexpensive at nine times next year's projected profits, but 2012 may be the peak of the cycle for defense contractors.
Another curious investment: a brand new $200 million stake in Intel (Nasdaq: INTC) represents yet another foray into tech stocks (along with IBM), an area he has traditionally avoided. Buffett likes large and stable companies that have a clear path to growth for an extended period. Yet the timing is a bit tricky as a range of new computing devices such as tablet computers and smartphones no longer routinely boast of "Intel Inside," as other chip makers such as ARM Holdings (Nasdaq: ARMH) start to make major inroads.
To be sure, you'd be hard pressed to find fault with Intel right now, because cash flow is very strong. And Buffett's likely expectation that Intel will dominate the microprocessor space for many, many years to come will still bear out. [StreetAuthority Co-founder Paul Tracy, who also edits our Top Ten Stocks newsletter, recently helped spell out the bull case for Intel in this article.]
Buffett has made it clear that the mid-August market swoon was when he was at his busiest, and that was right when Intel fell out of bed.
Just three months later, shares are already up a cool 25% off of those lows.
Buffett also bought nearly $200 million stakes in Visa (NYSE: V) and CVS Caremark (NYSE: CVS) -- two companies that are likely to be around for a long, long time. Yet it's a new $180 million stake in DirecTV (NYSE: DTV) that seems extremely logical if you know what Buffett typically likes in a stock.
The real charm of owning this satellite TV provider is the transformation of its cash flow statement. After nearly two decades of heavy spending to attract new subscribers and beef up its technology, the company is now focused on harvesting cash from all of its investments. Free cash flow soared from $1 billion in 2008 to $2.8 billion in 2010, and could hit $4 billion by 2013, according to Goldman Sachs.
All of that cash is being deployed in a pair of shareholder-friendly moves. Ever-rising stock buybacks (roughly $5 billion in 2010) have helped shrink the share count nearly 40% since 2005 to a recent 860 million. A fresh $6 billion buyback will maintain that trend. "At current rates, DirecTV will shrink the share count by 15% in both 2011 and 2012, providing significant support for EPS and FCF per share growth," predict Goldman's analysts.
There's more. DirecTV has been rumored to issue its first-ever dividend in 2012.The company will start small, but the dividend is likely to keep rising, and could equate to a 3% to 4% yield within a few years.
Buffett clearly spots a company that has real momentum in place. In the most recent quarter, DirecTV picked up 300,000 net new subscribers in the United States and 500,000 net new subscribers in Latin America at the direct expense of terrestrial cable players such as Time Warner Cable (NYSE: TWC). The company has hinted at some coming technology upgrades which management thinks could lead to even further subscriber gains.
Risks to Consider: Buffett bought many of these stocks in mid-August when the market swooned, and they've all rebounded since then. So it may be wisest to wait for a pullback if you want to build a "Buffett-like" portfolio.
Action to Take --> Warren Buffett's very active third quarter sends a powerful message about stocks -- one I was consistently noting when the market turned frightful in late July and early August: Blue chip "forever"-type stocks sell off sharply only rarely, and long-term investors should see these swoons as buying opportunities. Of all of Buffett's recent buys, DirecTV stands out as the closest thing to a "no-brainer" for long-term investors, by my thinking. It has a very sticky subscriber base and is reaping massive and rising cash flow now that its business model is largely mature.