Despite a tidal wave of selling at Buffett’s Berkshire Hathaway investment company, there was one stock he didn’t stop buying in the second quarter of 2024.
Warren Buffett is the CEO of the Berkshire Hathaway (BRK.A -0.59%) (BRK.B -0.48%) investment company, where he has overseen a compound annual return of 19.8% since he took the helm in 1965. That would have been enough to turn an investment of $1,000 back then into $44 million today!
That’s why investors closely watch Buffett’s every move, and he has made a lot of them lately. According to Berkshire’s 13-F filing for the second quarter of 2024 (ended June 30), the investment company sold a significant amount of stock, which suggests Buffett might be feeling cautious about the broader market.
However, he did buy another $345 million worth of one particular stock, and here’s why that might actually be a warning sign for investors.
Image source: The Motley Fool.
Berkshire sold several stocks during Q2, including half of its largest holding
The benchmark S&P 500 is unquestionably expensive right now. In fact, as my colleague Sean Williams points out, the index is currently trading at twice its historical valuation as measured by the Shiller (or CAPE) price-to-earnings ratio. Since Warren Buffett is a value investor, his recent caution isn’t a surprise.
Earlier this year, Berkshire held more than 900 million shares of Apple, which were worth a little over $170 billion at the time. The position accounted for almost half of the conglomerate’s entire stock portfolio, and considering it only had a cost-basis of around $38 billion, it was sitting on a very nice profit.
Berkshire sold small portions of its Apple shares over the years to lock in gains, but in the first quarter of 2024 (ended March 31), it dumped a sizable 13% of its stake. Buffett said it was for tax reasons, but then Berkshire proceeded to sell a whopping 49% of its remaining Apple stake during Q2!
Apple is still Berkshire’s largest position. Its remaining 400 million shares are worth over $90 billion at the current price of $226 as of this writing, which represents 28.8% of its portfolio. Therefore, I think Buffett’s recent sales reflect his stance on the broader market, as opposed to an issue with Apple itself.
My view is supported by the fact that Berkshire also trimmed its positions in Capital One Financial, T-Mobile, and Louisiana-Pacific Corp (to name just a few) during Q2, and sold its entire stakes in Snowflake and Paramount Global.
Berkshire is now sitting on a record $277 billion worth of cash and equivalents, which is a sign that Buffett is struggling to find value in this market. But it didn’t stop him from buying one stock in particular.
Why Buffett’s $345 million purchase of one stock might be a warning sign
The stock I’m talking about is… Berkshire Hathaway! Despite Buffett’s caution, he continued to authorize stock buybacks during Q2, plowing $345 million into Berkshire shares.
That isn’t bad or even unusual at face value, because Buffett has now authorized a whopping $77.8 billion worth of buybacks since 2018. That’s more than twice the amount Berkshire spent buying Apple! Buybacks are his preferred way to return money to shareholders — they shrink the total number of Berkshire shares in circulation, which organically increases the price per share.
However, the pace of those repurchases has slowed. In fact, $345 million was the smallest amount Berkshire spent acquiring its own shares during a single quarter since it resumed buybacks six years ago.
Berkshire can repurchase stock at its discretion, as long as its cash, equivalents, and holdings in U.S. Treasury bills remain above $30 billion. Since the conglomerate is sitting on $277 billion in dry powder right now, why isn’t Buffett being more aggressive?
It’s possible that he thinks Berkshire stock is expensive. It’s currently trading at a fraction below its all-time high, and the company was even a member of the $1 trillion club earlier this month before a modest pullback. Plus, Berkshire’s price-to-sales ratio is currently 2.44, which is 24% higher than its 10-year average of 1.97.
Buffett’s preference to sit on a record cash pile rather than put it to work in the market — or even use it for buybacks — is a warning signal to investors that perhaps valuations are a little too high right now. It’s possible he wants to be ready in case the S&P 500 enters a correction.
What should investors do?
Buffett himself will tell you he has no idea exactly where the stock market will be tomorrow, or even a year from now. He’s a long-term investor who buys into quality companies and lets time do the heavy lifting. He is an active manager, though, and he has a duty to Berkshire’s shareholders to make decisions which he feels will deliver the most value.
Sometimes that involves selling large volumes of stock, like he has in 2024.
Buffett recommends that regular investors purchase exchange-traded funds (ETFs) which directly track the performance of diversified indexes like the S&P 500. Consistently adding money to an ETF each month can yield great results over time. Even if the market seems pricey today, its current level will probably seem like a bargain when you look back in 10 years.
Berkshire actually holds a small position in the Vanguard S&P 500 ETF, which is one of the most cost-friendly funds investors can buy thanks to its expense ratio of just 0.03%. That might be a great place to start.