I just invested £500 into this Warren Buffett stock

A Warren Buffett stock looks to me like it’s offering a good opportunity with limited risk. That’s why I’ve just invested £500 of my own money into it.

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Warren Buffett at a Berkshire Hathaway AGM

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Key Points

  • Activision Blizzard is the 10th largest holding in the Berkshire Hathaway stock portfolio
  • The company has agreed to be acquired by Microsoft at a 20% premium to its current share price
  • If the deal doesn't go through, the underlying business generates a 3.5% cash return at today's prices

Earlier this week, I invested £500 into a stock that Warren Buffett has been buying recently. I think that it’s one of the stocks that the Berkshire Hathaway CEO has the most conviction in right now.

The stock is Activision Blizzard (NASDAQ:ATVI) and it’s an unusual investment for Buffett (and for me). But I think that shares are a bargain at the moment, so I’m buying them for my portfolio.

Normally, Buffett prefers to invest in companies that he thinks will do well over time. The plan is to hold the shares indefinitely and earn an ongoing return from the cash the business generates.

With Activision, however, the story is different. The intention is to turn a relatively quick profit by selling the shares to Microsoft next year.

Like Buffett, I usually prefer to invest for the long term, based on the strength of a company’s fundamentals. I see Activision shares as an opportunity to do something different, though.

Arbitrage

Earlier this year, Microsoft agreed to buy Activision Blizzard in its entirety at $95 per share. I just bought Activision stock at a price of $79.47. 

If the deal goes through, I’ll sell the shares for 20% more than I bought them for. I think that’s an attractive opportunity.

Buffett seems to think something similar. Berkshire has bought 10% of Activision’s outstanding shares with a view to profiting from Microsoft’s takeover of the company.

That makes Activision stock Berkshire’s 10th largest investment. At just over $5bn, it’s the size of Buffett’s investments in Amazon.com, Visa, and Mastercard combined.

To me, this indicates that Buffett has confidence that Activision stock is a good opportunity at the moment. And I have the same view.

The deal is scheduled to conclude early next year. So I’m anticipating turning my £500 investment into £600 in relatively short order.

Risk

Obviously, the biggest risk to this is the deal not completing. If it doesn’t, then the share price will likely fall to roughly where it was before the announcement of the Microsoft deal.

I don’t think that this would be a disaster for me, though. Even as a regular investment, Activision shares look reasonably attractive to me.

The price I bought the stock at implies a market cap of $62bn. The company has a strong balance sheet, with $3.6bn in debt offset by $10.4bn in cash.

Activision generates around $2bn in free cash flow for its shareholders. At the price I bought the stock at, that’s a return of around 3.5%.

I don’t think that a 3.5% return is an amazing opportunity. But for me, it’s adequate as a contingency if things don’t go to plan with my investment thesis.

That’s why I’ve been buying Activision shares. If things go as I expect, I anticipate making 20% in a year and if they don’t, then I’ll own what I think is a solid business generating a 3.5% return.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Activision Blizzard, Amazon, and Berkshire Hathaway (B shares). The Motley Fool UK has recommended Amazon, Mastercard, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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