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Warren Buffett can’t stop buying this incredible stock

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Warren Buffett can't stop buying this incredible stock

Warren Buffett has had a hard time finding a good stock to buy in today’s market. This is evident from the $168 billion in cash and government bonds on it Berkshire Hathaway‘S (NYSE: BRK.A)(NYSE: BRK.B) balance sheet at the end of 2023. But one stock has recently caught the attention of him and fellow investment managers Ted Weschler and Todd Combs.

These Berkshire fund managers have invested about $2.8 billion in the company to date, having added more than $760 million to the investment in March and nearly $100 million so far in April. Despite the significant stake in the company, the stake still represents less than 1% of Berkshire’s entire investment portfolio. That points out the challenge for Buffett is to find an investment big enough to move the needle on Berkshire.

But for anyone who wants that Invest like Warren Buffettit could be a great opportunity to follow in his footsteps and buy a value stock that he and his team find interesting.

A close-up of Warren Buffett.A close-up of Warren Buffett.

Image source: The Motley Fool.

Here’s the value stock Warren Buffett can’t stop buying

From 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 “tracking stock.” Stock tracking is designed to track the activities of a specific segment of a company. In this case, Liberty SiriusXM is following Liberty Media’s share Sirius XM (NASDAQ: SIRI).

Berkshire has added a small portion of Sirius And it continues to contribute mainly to stock tracking.

The reason seems fairly simple. The business of Sirius

In December, Liberty Media announced a deal to combine its interests with Sirius XM. As a result, Liberty SiriusXM shareholders will receive approximately 8.4 shares of the new Sirius XM stock when the deal closes, which is expected to be in the third quarter of this year. At the current market price, 9.4 shares of Sirius XM are worth approximately $28.25. Meanwhile, the same number of Liberty SiriusXM shares are trading for just $26.20.

Importantly, this appears to be more than just an arbitrage game. Something that Buffett and his team did with Activision after the announced acquisition by Activision Microsoft. In that deal, Buffett profited from the difference between Activision’s share price and the agreed acquisition price.

However, in this case, Berkshire also acquired a small amount of Sirius XM stock. Additionally, the discount offered by the Liberty SiriusXM tracking stock has all but dried up. When the merger was announced in December, shareholders could have received a 35% discount. As such, the future performance of the tracking stock is closely tied to the performance of Sirius XM itself.

This is why Berkshire loves Sirius XM

Sirius XM is the largest satellite radio operator in the United States. And while most radio operators make the majority of their revenue from advertising, Sirius XM generates the majority of their revenue from subscriptions. This makes the country much more resilient to economic cyclicality and produces more consistent income.

Although the subscriber base has stagnated at around 34 million in recent years, there is still room to grow that number. Management increased the number of free trial customers to 7.2 million at the end of last year, up from 6.8 million the year before. With a subscriber churn rate of 1.6%, the company should manage to convert a large portion of its trial members into self-paying subscribers in the coming year.

It also invests in growing the top of the funnel. The company is building out its library of exclusive content and working with automakers to install the latest equipment, which has led to 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 its overall business. Meanwhile, Sirius XM’s biggest advantage over streaming is that its royalty costs as a radio service are much lower than as on-demand streaming. This allowed it to achieve a strong gross margin compared to the competition and gave it more freedom to invest in growing its subscriber base.

Sirius XM stock trades at just eleven times forward earnings estimates. At that valuation, there is much more upside than downside potential in the stock. And if you can get an even bigger discount on the stock by buying the Liberty SiriusXM tracker stock, it becomes an even better deal. That’s why Buffett and his team can’t stop buying the stock.

Should You Invest $1,000 in Liberty SiriusXM Group Now?

Consider the following before purchasing shares in Liberty SiriusXM Group:

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Adam Levy holds positions at Microsoft. The Motley Fool holds positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.

Warren Buffett can’t stop buying this incredible stock was originally published by The Motley Fool