For the third consecutive quarter, Warren Buffett has undertaken this action, which serves as a significant indication of potential turbulence in the stock market.
Warren Buffet, renowned as the top-tier investor across generations, has consistently delivered stellar results at Berkshire Hathaway (BRK.A -0.13%, BRK.B -0.16%), a company he's steered for almost six decades. This wealth creation journey has made many other investors rejoice along with him.
Given Buffet's influence in the investment world, many investors closely monitor his moves to gather market insights. Fortunately, the Oracle of Omaha has been generous in offering advice throughout his illustrious career marked by record-breaking returns.
Therefore, it raised eyebrows when Berkshire's 13F filing – released last Thursday, and illustrating the company's stock acquisitions and disposals – showed that Buffet's pessimistic outlook on stocks remained unchanged. For the third consecutive quarter, Berkshire reduced its portfolio by shedding equities during an unstoppable bull market.
The company's portfolio shrank from $280 billion to $266 billion in the quarter, and it's down from $352 billion at the close of 2023. Moreover, Berkshire didn't repurchase its stock for the first time in six years during this period.
These indications seem to imply that Buffet is possibly preparing for a potential stock market correction, as stock valuations have reached an extreme high. The S&P 500 boasts a price-to-earnings ratio of 30, and the CAPE ratio, a valuation measure based on earnings over the past decade, is nearing an all-time high. Consequently, Berkshire parted ways with seven stocks and acquired three during the quarter.
It disposed:
- 100,000 shares of Apple
- 235,168,699 shares of Bank of America
- 719,052 shares of Capital One
- 20,679,787 shares of Nu Holdings
- 1,007,062 shares of Charter Communications
- 665,903 shares of Ulta Beauty
- 3,977,870 shares of Floor & Decor
It purchased:
- 1,277,256 shares of Domino's Pizza
- 5,445 shares of Heico
- 404,057 shares of Pool Corp.
The reasons behind Berkshire's stock sales
Although Apple remains Berkshire's most significant holding, the company has ceaselessly offloaded this stock since the fourth quarter of 2023. During this phase, they decreased their holdings from 915.6 million shares to just 300 million in the third quarter, generating approximately $120 billion in cash in the process.
Buffet clarified his decision to sell Apple shares by mentioning the ongoing rumors in Washington regarding the potential increase in capital gains or corporate taxes. Moreover, at Berkshire's annual shareholder meeting, he suggested that higher taxes were a very likely consequence of growing national debt, which seems less plausible now with President-elect Donald Trump about to move into the White House.
However, Buffet hasn't explicitly declared that stocks are overvalued. Instead, he lamented the absence of attractively priced targets for potential acquisitions. While Berkshire has been disposing of stock, it has been investing the consequent cash into Treasury bills, a safe haven if the stock market experiences a pullback.
The implications for investors
Predicting short-term stock market fluctuations is nearly impossible, and although stocks seem overpriced according to traditional metrics, the overall economy appears robust with a low unemployment rate, tamed inflation, and the Fed initiating rate cuts to fuel economic growth.
Indeed, there are legitimate reasons for stock valuations to swell, such as the artificial intelligence boom, which contributed trillions to the stock market and even made Nvidia the most valuable company globally. Moreover, investors seem optimistic about the Trump administration, anticipating further tax cuts and deregulation, and reduced interest rates are often bullish for stocks.
Regardless, Buffet's signals are undeniable. As a market sage, Buffet may not be able to predict a stock market crash, but he certainly recognizes when stock prices appear excessively high. It's essential not to ignore his perspective amidst market euphoria.
Based on Berkshire Hathaway's recent actions, it seems that Warren Buffet is cautious about the current market conditions, potentially preparing for a potential stock market correction. This is evident in the company's decision to sell stocks and reduce its portfolio while cash reserves are being invested in Treasury bills.
Investors looking to emulate Buffet's investment strategies might want to consider diversifying their portfolios and being mindful of the potential risks associated with overvalued stocks, despite the robust economy and positive market sentiment.
