Among the billionaire investors on Wall Street are: Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett is, arguably, in a class of his own. In a world where investors are using sophisticated charting software and artificial intelligence (AI) to gain a competitive edge, Buffett and his team have relied on old-fashioned fundamental statistics and detective work to find great companies.
Since taking the reins as CEO in 1965, the aptly named “Oracle of Omaha” has overseen a cumulative return of nearly 5,200,000% for Berkshire’s Class A shareholders (BRK.A). It’s no surprise that professional and everyday investors alike often wait on tenterhooks for details about which stocks Buffett and his team have been buying and selling.
Although Berkshire Hathaway’s Form 13F — the document that tells investors what Wall Street’s top money managers bought and sold in the most recent quarter — is a little over a week away, investors don’t always have to wait three months for clues about what Buffett and his team have been up to. For example, if Berkshire has a 10% or more stake in a publicly traded company, it must file a Form 4 with the Securities and Exchange Commission (SEC) every time it buys or sells shares.
Berkshire’s recent Form 4 filings point to an ominous and unmistakable warning to Wall Street from the Oracle of Omaha and his trusty investment advisers, Todd Combs and Ted Weschler.
Warren Buffett has sold shares of Bank of America for 12 consecutive trading sessions
For years, the banking giant bank of america (NYSE: BAC) has maintained its position as the second-largest holding in Berkshire’s 44-stock, $395 billion investment portfolio, behind only tech stocks Apple (NASDAQ: AAPL).
The cyclical nature of financial stocks, that is, the fact that they can benefit from economic expansions that last for a long time, substantial longer than recessions — combined with their robust capital return programs, makes them attractive to the Oracle of Omaha. Bank of America, in particular, is the most interest-rate sensitive of America’s largest money-center banks. It has enjoyed an outsized upside in net interest income following the Federal Reserve’s most aggressive rate-hike cycle in four decades.
Buffett’s love affair with Bank of America, however, appears to be in doubt. Four recent Form 4 filings with the SEC show that Berkshire Hathaway’s brightest investment minds sold shares of BofA during 12 consecutive trading sessions (July 17-August 1). A total of 90,422,124 shares of Bank of America were sold, for a total of about $3.82 billion.
There are a number of legitimate reasons why Buffett and his investment team have reduced Berkshire’s stake in Bank of America by about 9% in two weeks.
Profit-taking is one possible answer. At Berkshire’s most recent annual shareholder meeting, Buffett opined that corporate tax rates were likely to rise in the future. The prospect of higher corporate tax rates forced the sale of more than 116 million shares of Apple stock in the first quarter, along with a nearly 50% cut in the tech giant in the second quarter, and may encourage a cut in BofA in the third quarter.
Bank of America’s interest rate sensitivity could also explain 12 consecutive business days of selling activity. Just as BofA has enjoyed an outsized benefit from rising rates, the expectation of a rate-cutting cycle starting in September could cause its net interest income to shrink faster than that of its peers.
But more than anything, 12 straight days of selling off Bank of America shares seems to indicate that value is getting harder to find on Wall Street. With BofA trading above book value, a rarity over the past 15 years, maybe it just isn’t as attractive to the Oracle of Omaha and/or its team anymore.
Warren Buffett wants nothing to do with the Wall Street ‘casino’
Believe it or not, Buffett’s massive sales of both Apple and Bank of America were somewhat foreshadowed earlier this year when the Oracle of Omaha released its annual letter to shareholders. While the letter is often used to promote a long-term ethos and tout Berkshire’s “perpetual” holdings, it also served as a cautionary tale for the investment community.
In his 2023 letter to shareholders, Buffett spoke about casino-like behavior that he wants no part of. The Berkshire boss said:
Although the stock market is much larger than it was in our early years, today’s active participants are neither more emotionally stable nor better educated than I was in school. For whatever reason, markets now exhibit much more casino-like behavior than they did when I was young. The casino is now in many homes and entices the occupants daily.
While I’m not a mind reader, this sounds like a roundabout way to admit that stocks are expensive. In his nearly six decades as CEO, Buffett has emphasized patience in waiting for great companies to fall to attractive price points. The $277 billion (and growing) in collective cash, cash equivalents, and U.S. Treasuries on Berkshire’s balance sheet (as of June 30) speaks to the lack of value that the Oracle of Omaha and his team see.
To further emphasize this point, Warren Buffett has been a net seller of stocks for seven consecutive quarters, as of June 30, 2024 (dollar amount represents net sales activity for a recorded quarter):
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Q4 2022: $14.64 billion
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Q1 2023: $10.41 billion
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Q2 2023: $7.981 billion
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Q3 2023: $5.253 billion
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Q4 2023: $0.525 billion
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Q1 2024: $17.281 billion
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Q2 2024: $75.536 billion
For those of you without a calculator, that equates to cumulative net sales activity of $131.6 billion as of October 1, 2022.
The reality for Buffett, and for investors generally, is that the stock market is historically expensive.
The S&P 500A company’s Shiller price-earnings (P/E) ratio, also known as the cyclically adjusted price-earnings (Cape) ratio, recently reached levels seen only a few times in the past 153 years.
While most investors are likely familiar with the traditional price-to-earnings ratio, which divides a company’s stock price into its earnings per share over the past 12 months, the Shiller price-to-earnings ratio is based on average inflation-adjusted earnings over the previous 10 years. Using 10 years of earnings history smooths out the effect of one-off events that could otherwise negatively impact valuation models.
On August 1, 2024, the Shiller P/E closed at 35.13. There have only been six occasions since its inception in 1871 when the S&P 500’s Shiller P/E has exceeded 30 during a bull market rally. After the five previous incidents, the S&P 500, Dow Jones Industrial Averageand/or Nasdaq Composite all down 20% to 89%. While the Shiller P/E ratio is no help in predicting when big declines will occur on Wall Street, this valuation metric has an impeccable track record of predicting trouble for Wall Street.
Warren Buffett’s willingness to step away from the proverbial casino and meaningfully reduce his company’s leading stakes in Apple and now Bank of America strongly suggests that he’s struggling to find value. It’s a concern that investors would be wise not to ignore.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett Sells Over $3.8 Billion Worth of Bank of America Stock in 2 Weeks, Sending Ominous and Unmistakable Warning to Wall Street Originally published by The Motley Fool
