Warren Buffett has been hard-pressed to find a great stock to buy in today's market. That's evidenced by the $168 billion in cash and treasuries that sat on Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) balance sheet at the end of 2023. But one stock has caught his and fellow investment managers Ted Weschler and Todd Combs' eyes recently.
These Berkshire fund managers have invested approximately $2.8 billion into the company so far after adding over $760 million to the investment in March and nearly $100 million more so far in April. Despite the significant holding in the company, the stake still represents less than 1% of Berkshire's entire investment portfolio. That points to the challenge for Buffett to find an investment big enough to move the needle at Berkshire.
But for anyone who wants to invest like Warren Buffett, it could be a great opportunity to follow in his footsteps and buy a value stock he and his team find interesting.
Image source: The Motley Fool.
Here's the value stock Warren Buffett can't stop buying
Starting in the third quarter of 2023, Berkshire Hathaway started investing in an interesting stock: Liberty SiriusXM(NASDAQ: LSXMA)(NASDAQ: LSXMK).
Liberty SiriusXM is a special type of stock called a "tracking stock." Tracking stocks are designed to track the operations of a specific segment of a business. In this case, Liberty SiriusXM tracks Liberty Media's stake in Sirius XM(NASDAQ: SIRI).
Berkshire added a small amount of Sirius XM's own stock since the third quarter last year, according to SEC filings, but the holding company has bought far more of Liberty's tracking stock. And it's continued to add primarily to its tracking stock holdings.
The reason appears fairly straightforward. Sirius XM's business appeals to Buffett and his team, but the Liberty SiriusXM stock is a way to buy a stake in the business at a discount to buying Sirius XM stock directly.
In December, Liberty Media announced a deal to combine its holdings with Sirius XM. The result is that Liberty SiriusXM shareholders will receive approximately 8.4 shares of the new Sirius XM stock when the deal is finalized, which is expected in the third quarter of this year. At today's market price, 9.4 shares of Sirius XM are worth about $28.25. Meanwhile, the same amount of Liberty SiriusXM shares trade for just $26.20.
Importantly, this appears to be more than just an arbitrage play. Something Buffett and his team did with Activision following its announced acquisition by Microsoft. In that deal, Buffett took advantage of the discrepancy between Activision's share price and the agreed-upon acquisition price.
In this case, however, Berkshire has also acquired a small amount of Sirius XM stock. Furthermore, the discount afforded by the Liberty SiriusXM tracking stock has nearly dried up. When the merger was announced in December, shareholders could've gotten a 35% discount. As such, the future performance of the tracking stock is closely tied to the performance of Sirius XM itself.
Here's why Berkshire likes Sirius XM
Sirius XM is the largest satellite radio operator in the United States. And while most radio operators generate the bulk of their revenue from advertising, Sirius XM generates the bulk of its revenue from subscriptions. That makes it far more resilient to economic cyclicality, and it produces more consistent revenue.
While the subscriber base has stagnated at around 34 million over the past few years, there's still room for that number to grow. Management increased the number of customers on a free trial to 7.2 million at the end of last year, up from 6.8 million the year before. With subscriber churn sitting at 1.6%, it should manage to convert a large portion of those trial members to self-pay subscribers over the next year.
It's also investing in growing the top of the funnel. It's building out its library of exclusive content while working with car manufacturers to install its latest equipment, which has shown improved conversion rates from trial users to self-pay customers.
Streaming remains Sirius XM's biggest threat. It acquired Pandora as a means to combat that threat, but it remains a small part of the overall business. Meanwhile, Sirius XM's biggest advantage over streaming is that its royalty fees are far lower as a radio service versus on-demand streaming. That's allowed it to produce a strong gross margin relative to the competition and gives it more freedom to invest in growing its subscriber base.
Sirius XM's stock trades for just 11 times forward earnings estimates. At that valuation, there's far more upside than downside in the stock. And if you can get a further discount on the shares by buying the Liberty SiriusXM tracker stock, it makes it an even better deal. That's why Buffett and his team can't stop buying the stock.
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Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
