Warren Buffett’s top lieutenant just executed the biggest stock sale of his career.
Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.96%) is a top stock for many long-term investors. It’s led by the famed investor Warren Buffett, it owns a diverse mix of businesses, and it’s outperformed the S&P 500 annually on average ever since its IPO in 1980.
That’s why it was alarming when Ajit Jain, who served as Berkshire’s insurance chief for nearly four decades, recently liquidated more than half of his shares for $139 million. That marked Jain’s biggest stock sale since he joined the company in 1986. Jain still holds $112 million in shares through his personal holdings, trusts, and a nonprofit foundation.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
That sale occurred around the same time Berkshire’s Class A shares set a new record high of $715,910 on Sept. 3, which propelled its market cap past $1 trillion for the first time ever. Its shares have pulled back about 4% since then and reduced its value to about $990 billion. So should Berkshire’s investors follow Jain’s lead and take some profits off the table?
Why did Ajit Jain sell more than half his shares?
Jain didn’t publicize or explain his big stock sale, but there could be a few simple explanations. He’s 73 years old, so he could be retiring soon. Jain was once considered a potential successor to Warren Buffett, but Buffett plans to pass the torch to Greg Abel, who currently leads Berkshire’s energy and non-insurance businesses.
Buffett celebrated his 94th birthday last month, so he could step down in the near future. Jain, like many of Berkshire’s longtime investors, might consider that to be an end of an era and the perfect time to cash in some shares.
Jain also might think Berkshire’s stock and the broader market are overvalued. Berkshire’s stock price has more than doubled over the past five years, and it isn’t cheap at 26 times last year’s operating earnings (which Buffett uses as his preferred profitability metric instead of its net income or earnings per share). Five years ago, it was trading at 21 times its trailing operating earnings for 2018.
As for the S&P 500, it’s also historically expensive at 22 times forward earnings. That might also be why Berkshire has been selling a lot of its top stocks — including Apple and Bank of America — and raising more cash.
Therefore, Jain’s sale doesn’t necessarily mean Berkshire’s business is in trouble. It could simply be driven by some personal decisions or a belief that the stock’s near-term gains are limited.
What’s Berkshire Hathaway’s long-term strategy?
Last year, Berkshire Hathaway generated 40% of its operating earnings from its insurance underwriting and insurance investment subsidiaries. The remaining 60% came from its other subsidiaries across the railroad, utility, energy, and consumer staples sectors. Its operating earnings notably don’t include gains or losses from its closely watched investment portfolio of more than 50 stocks and ETFs, since those numbers can fluctuate wildly from year to year.
Berkshire’s main strategy is to tap its core businesses to generate fresh cash for its investment portfolio. That strategy works because its core subsidiaries are cash-rich businesses, and Buffett excels at picking long-term winning stocks for its portfolio. Some investors might wonder if Berkshire can keep making the right investments if Buffett retires, but his successors probably won’t stray too far from his strategy of picking value stocks and blue chip stalwarts over high-growth plays.
In 2023, the growth of Berkshire’s insurance businesses offset the macro headwinds for most of its non-insurance businesses, and its total operating earnings grew by 21%. Its non-insurance businesses should grow faster this year as interest rates decline.
Berkshire ended the second quarter of 2024 with a record $276.9 billion in cash and equivalents, so it’s clearly keeping some powder dry for more investments and acquisitions in case the market pulls back from its historic highs. Therefore, it might be bracing for some short-term pain — but it’s getting ready to plant the seeds for some more long-term gains.
Will Berkshire Hathaway’s stock keep heading higher?
Berkshire Hathaway has consistently beat the market, and I don’t expect that trend to change anytime soon. Ajit Jain’s sale suggests its stock is approaching a near-term high, but it should still generate bigger gains over the next few years.
Berkshire Hathaway is a stock built to generate long-term gains, so investors shouldn’t fret too much over its insider sales, fluctuating valuations, or other short-term trading signals. Instead, they should appreciate its diversification, flexibility, and ability to keep growing regardless of the macroeconomic challenges.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.