Buffet Abandons Long-time Favorite Stock in S&P 500 Portfolio for Initial Time Since 2018, Potentially Indicating Difficulties for the S&P 500 Index
Warren Buffet serves as the head honcho at Berkshire Hathaway (BRK.A -0.55%, BRK.B -0.60%). Under his guidance, Berkshire's stock has delivered a jaw-dropping compound annual return of 19.8% since 1965, transforming an initial $1,000 investment into an astonishing $42 million.
In contrast, that same investment in the S&P 500 would have maxed out at a mere $308,115 over the same period, thus making Buffet's moves a hot topic on Wall Street.
Fast-forward to 2024, Buffet has been offloading shares this year, hinting at some market jitters. According to the Q3 13-F filing, Berkshire continued to unload a substantial chunk of shares.
However, Q3 also marked the first time in six years that Buffet refrained from investing in his beloved company. This decision has sent ripples through Wall Street.
Berkshire slashes its largest investment by half
Between 2016 and 2023, Berkshire splurged approximately $38 billion purchasing Apple (NASDAQ: AAPL) shares. This was the conglomerate's largest investment to date. Rolling into 2024, this position carried a value worth more than $170 billion, translating to a staggering profit of around $130 billion.
At this juncture, Apple represented half of Berkshire's publicly traded portfolio. Over the years, the conglomerate proportionately sold Apple shares to bank some gains.
However, the tide turned this year, with Berkshire offloading 13% of its Apple shares in Q1 for tax reasons. In Q2, it further sold 49% of its remaining shares, leaving no concrete explanation. In Q3, the conglomerate then sold another 25% in the remaining shares.
Yet, Apple remains Berkshire's largest position at roughly 23.3% of its portfolio, with Buffet assuring it will continue to hold that position for now. But, Apple isn't the only stock Berkshire has offloaded this year.
The investment company trimmed its stake in Bank of America, Capital One Financial, Chevron, T-Mobile, and more. Moreover, it sold its entire stakes in HP, Paramount Global, Snowflake, and Floor and Decor Holdings.
In fact, Berkshire is now sitting on a record $325 billion in liquid assets, indicating that Buffet is stockpiling funds for a potential market correction.
The S&P 500, ridiculously overpriced
Market-wise, the S&P 500 is the crème de la crème, boasting a diverse range of companies. This index has smashed multiple records this year, extending the bullish market that began in October 2022. However, it's now engrossed in an expensive bubble when measured by the most common valuation formula.
At this writing, the S&P 500 trades at a price-to-earnings (P/E) ratio of 25.6. This represents a whopping 41% premium to its historical average of 18.1. That said, even though markets can remain overpriced for an extended period, valuation itself doesn't justify selling.
Nonetheless, Buffet's investing strategy revolves around buying top-notch companies at reasonable prices and holding onto them for the long haul. Given the current overpriced landscape, it's quite likely that Buffet is maximizing Berkshire's profits, preparing for more wallet-friendly opportunities in the future.
Buffet ditched his top pick during Q3
Since 2018, there has been one stock that Buffet has invested in, no matter the market conditions. An intriguing fact – you won't find this stock in Berkshire's Q3 13-F filings because it's none other than Berkshire Hathaway.
Buffet has authorized the repurchase of a mind-blowing $77.8 billion worth of Berkshire shares since 2018. This is a whopping double the amount Berkshire invested in Apple. Repurchasing shares is overall Buffet's chosen method for returning value to shareholders. When Berkshire purchases its own shares in the open market, the count of available shares diminishes, in turn, enhancing the price per share.
In Q2 2024, Berkshire repurchased shares worth only $345 million, which is the smallest amount since the repurchase program was set up six years ago. This further echoed Buffet's caution. That caution, however, escalated into a glaring red alert in Q3 when he authorized no repurchases of Berkshire shares – a first since the inception of the buyback program in 2018. Speculations for this move point toward the stock being currently overvalued in Buffet's view. The stock currently trades at a price-to-sales (P/S) ratio of 2.25, an 13% increase from its 10-year average of 1.98.
However, Berkshire's buyback program isn't exactly a done deal. Berkshire can purchase shares at management's discretion, as long as the conglomerate's cash, equivalents, and Treasury bond holdings remain above $30 billion. Being flush with $325 billion in liquid assets, Buffet might just need a correction in the stock before restarting the buyback spree.
Despite the fact that a substantial investment firm like Berkshire is offloading shares en masse, rejecting buybacks, and building up their cash reserves, it's not exactly a positive indicator for the general market. I'm not advocating for investors to panickily sell off their stock portfolios, but it might be wise to mentally brace yourselves for a potential adjustment within the S&P 500 within the coming year or so.
Should we witness this adjustment, it will more than likely present itself as a protracted purchase chance.
Buffet's decision to offload shares in various companies, including Apple and Bank of America, has raised concerns among investors. This selling spree has resulted in Berkshire Hathaway amassing a record $325 billion in liquid assets, indicating a potential market correction strategy.
Given Buffet's investment strategy, the current overpricing of the S&P 500 might be encouraging him to hold onto cash and wait for more wallet-friendly opportunities to emerge, thus bracing investors for a potential adjustment within the S&P 500.
