Warren Buffett is the CEO of the conglomerate Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). Under his leadership, Berkshire shares have delivered a compound annual return of 19.8% since 1965, which would have been enough to turn a $1,000 investment into a whopping $42 million.
The same investment in the S&P500 would have grown to just $308,115 over the same period, so it’s no surprise that Wall Street is watching Buffett’s every move.
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Buffett is on a selloff this year, which is a sign he may be feeling cautious about the broader market. According to Berkshire’s 13-F filing for the third quarter of 2024, the conglomerate continued to dump a significant amount of stock.
However, the third quarter also marked the first time in six years that Buffett failed to buy shares in his favorite company – and that could set off alarm bells on Wall Street.
Image source: The Motley Fool.
Between 2016 and 2023, Berkshire spent about $38 billion acquiring stock Apple(NASDAQ: AAPL)which is the most money the conglomerate has ever invested in a company. That position was worth more than $170 billion in 2024, meaning Berkshire made a profit of more than $130 billion.
At the time, Apple represented about half of Berkshire’s portfolio of publicly traded stocks and securities. The conglomerate had sold small packets of Apple stock over the years to preserve profits, but it really ramped up sales this year.
Berkshire sold 13% of its Apple position in the first quarter, and Buffett said this was for tax reasons. But Berkshire then sold 49% of the remaining Apple shares in the second quarter, with no real explanation. Finally, in the third quarter, the conglomerate sold 25% of what was left.
Apple is still Berkshire’s largest holding at 23.3% of its portfolio, and Buffett says it will remain that way for a while. But that’s not the only stock the investment firm has shorted this year.
Berkshire has reduced its stake in the company Bank of America, Capital one financial, Chevron, T-Mobileand more. Moreover, it sold back its entire shares PK, Big global, SnowflakeAnd Flooring and decor companies.
In fact, Berkshire now has a record $325 billion in cash, suggesting that Buffett is stockpiling dry powder that he can deploy in the event of a market correction.
The S&P 500 is the most diversified of the major U.S. stock indexes. It has hit multiple new all-time highs this year, continuing the raging bull market that began in October 2022. But measured by the most commonly used valuation metric, it is now undeniably expensive.
At the time of writing, the S&P 500 is trading at a price-to-earnings (P/E) ratio of 25.6. That’s a 41% premium over the long-term average of 18.1, dating back to the index’s founding in the 1950s.
Markets can remain expensive yearso appreciation alone is not a good reason to sell. However, Buffett’s strategy is to buy great companies at a fair price and hold them for the long term. He clearly sees this period as a good opportunity to capture some of the incredible profits Berkshire has earned in recent years, in preparation for cheaper prices at some point in the future.
There has been one stock that Buffett has bought every quarter since 2018, regardless of broader market conditions. You won’t find it in Berkshire’s 13-F filings because the stock is Berkshire Hathaway.
Buffett has authorized the buyback of as much as $77.8 billion of Berkshire stock since 2018, which is more than double the amount the conglomerate invested in Apple. Buybacks are Buffett’s preferred way to return money to shareholders; when Berkshire buys its own shares on the open market, it reduces the number of shares in circulation, causing the price per share to rise organically.
During the second quarter of 2024, Berkshire completed just $345 million in buybacks, which was the smallest amount since this program began six years ago. That was another clear sign of Buffett’s caution, but that sign turned into a bright red alert in the third quarter when he allowed zero buyback of Berkshire shares:
BRK.A Share buyback data (quarterly) according to YCharts
It was the first time he avoided his favorite stocks since the buyback program started in 2018. It’s possible he thinks it’s just too expensive right now. The stock trades at a price-to-sales ratio (P/S) of 2.25, which is a premium of 13% to its 10-year average of 1.98:
BRK.A PS Ratio data according to YCharts
This probably won’t be the end of Berkshire’s buyback program. The conglomerate can buy back shares at management’s discretion, as long as its cash, equivalents and holdings in U.S. Treasury securities remain above $30 billion. Since it’s currently sitting on $325 billion in dry powder, Buffett is probably just waiting for a correction in the stock before resuming buybacks.
Still, when a multibillion-dollar investment giant like Berkshire dumps truckloads of stock, eschews buybacks and hoards cash, it’s not a good sign for the broader market. I’m not suggesting that investors rush to sell their stock portfolios, but it is a good idea to be mentally prepared for a possible correction in the S&P 500 in the coming year.
If we see a correction, it will almost certainly be a long-term buying opportunity.
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Bank of America is an advertising partner of Motley Fool Money. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, HP and Snowflake. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
Warren Buffett shunned his favorite stock for the first time since 2018, and it could spell trouble for the S&P 500 originally published by The Motley Fool
