Buffett’s aggressive purchase of this stock has nothing to do with its recent reverse stock split.
Warren Buffett bought only seven stocks for Berkshire Hathaway‘s portfolio in the second quarter of 2024. He seemed to be especially enthusiastic about Sirius XM Holdings (SIRI 3.87%), increasing Berkshire’s stake by 262%.
Rest assured that Sirius XM’s 1-for-10 reverse stock split conducted earlier this month had nothing to do with Buffett’s purchase of more shares. The legendary investor might have liked the related decision to merge Liberty Media‘s holdings in the company with Sirius XM. However, he knows that stock splits of any shape, form, or fashion change nothing about the underlying business.
So, why is Buffett buying this stock-split stock hand over fist? I think there are three main reasons.
1. He understands Sirius XM’s business
Buffett famously shuns investing in businesses that he doesn’t understand. He missed out on huge gains in several of today’s top tech stocks because their business models weren’t in his wheelhouse. However, Buffett no doubt understands Sirius XM’s business.
He’s said to be a fan of Sirius XM’s satellite radio. Reportedly, Buffett especially likes the “Siriusly Sinatra” channel that plays Frank Sinatra music along with other similar crooners, including Tony Bennett and Dean Martin.
Although Sirius XM’s business isn’t the same as a newspaper’s business, there are some distinct similarities — notably including that they both rely on subscriptions for revenue. As a former paper boy, Buffett definitely knows how subscription models work.
Buffett has also always prized companies with dominant market positions. Sirius XM has a monopoly in the satellite radio business in the U.S. and is a major player in the podcast market.
2. He views management favorably
Many know Buffett once said, “[O]ur favorite holding period is forever.” What they often leave out, though, is that he prefaces that remark by saying it applies “when we own portions of outstanding businesses with outstanding managements.” I suspect a key reason Buffett has invested so heavily in Sirius XM is that he views its management favorably.
Sirius XM CEO Jennifer Witz joined the company in 2002. She served in several financial and operating positions, including chief marketing officer from August 2017 through March 2019 and president of sales, marketing and operations from March 2019 through December 2020. Witz moved into the CEO role in January 2021. Before working at Sirius XM, she held executive positions at Viacom (now part of Paramount Global) and Metro-Goldwyn-Mayer (now owned by Amazon).
Importantly, she has plenty of skin in the game. Witz owns nearly 12.1 million shares of Sirius XM.
3. He thinks the price is right
Buffett learned from Benjamin Graham, the “father of value investing.” He remains a value investor at heart despite straying from Graham’s philosophy somewhat over time. Buffett would never buy a stock if he didn’t think its valuation was attractive. He undoubtedly thinks the price is right with Sirius XM.
The numbers back him up. Sirius XM trades at a forward price-to-earnings ratio of 6.4, making it one of the cheapest stocks in Berkshire Hathaway’s portfolio.
In 2013, Buffett wrote to Berkshire Hathaway shareholders, saying his first step in evaluating whether to buy a stock is to “decide whether we can sensibly estimate an earnings range for five years out, or more.” If that answer is yes, he will buy the stock only if its price is attractive relative to the lower end of his estimated earnings range.
This approach shares much in common with a valuation metric popularized by Peter Lynch — the price-to-earnings-to-growth (PEG) ratio. Lynch maintained that a stock with a PEG ratio of less than 1.0 was valued attractively. Sirius XM’s PEG ratio is 0.64, according to data from LSEG.
Did Buffett look at Sirius XM’s low PEG ratio before buying the stock? Probably not. However, I suspect his analysis revealed that the company’s price is attractive with its earnings growth factored in.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
