Warren Buffet is Offloading Shares at an unprecedented Rate and Steering Clear of His Preferred Stock for the Initial Time since 2018
Warren Buffet is Offloading Shares at an unprecedented Rate and Steering Clear of His Preferred Stock for the Initial Time since 2018
Buffet, often recognized as one of the most successful investors in American history, holds a significant influence over Berkshire Hathaway's performance. The company's shares, denoted by BRK.A (-1.96%) and BRK.B (-1.99%), have witnessed an astronomical increase of over 5,400,000% since Buffet took control in the mid-60s, thanks mainly to his strategic acquisitions and share purchases. In comparison, the S&P 500 has yielded approximately 37,500%.
Buffet manages approximately 90% of Berkshire's investment portfolio. The remaining portion is handled by his apprentices, Ted Weschler and Todd Combs. Furthermore, Buffet has the authority to repurchase Berkshire shares when he deems them undervalued. In the third quarter, these decisions likely played a significant role:
- Berkshire parted ways with about 100 million shares of Apple (AAPL -2.14%), reducing its stake in Apple by a substantial 67% year to date. Despite this, Apple continues to be Berkshire's largest investment.
- Berkshire opted out of repurchasing stocks in the third quarter, breaking a six-year streak where Buffet invested $78 billion in buybacks. This absence of buybacks indicates that Buffet believes Berkshire shares are currently overpriced.
- Berkshire indulged in net stock sales during the third quarter, marking the most aggressive selling behavior in Berkshire's history. The company has sold $127 billion worth of stocks year to date.
Noteworthy, Berkshire reported $325 billion in cash and short-term investments, including U.S. Treasury bills, as of September 30th. This substantial pool of funds, combined with the aggressive selling, implies that Buffet is having difficulty locating attractive investment opportunities.
Should Apple stock be sold?
Apple has maintained a strong presence in various consumer electronics sectors. It ranks second in global smartphone shipments, but its exceptional pricing power places it at the top of smartphone sales. Apple holds the first position in smartwatch and tablet shipments, while ranking fourth in PC shipments.
Apple's services segment has been flourishing, augmenting its product sales. Once someone buys an iPhone, Apple can generate continuous revenue via services like iCloud storage, App Store downloads, and advertising, Apple Pay, and subscriptions like Apple TV+. With services having higher profit margins than hardware products, this segment is expected to become Apple's major revenue source in the future.
In the fourth quarter of fiscal 2024, Apple reported strong financial results, surpassing estimates on both revenue and earnings. Total revenue increased 6% to $95 billion, with a 4% growth in product sales and a 12% increase in services. Moreover, non-GAAP earnings rose 12% to $1.64 per diluted share.
Apple's primary challenge lies in its valuation. Analysts predict that Apple's earnings will grow at an annual rate of 10% over the next three years. Given this, the stock's current valuation of 36.7 times earnings appears expensive. The resulting PEG ratio of 3.7 represents a substantial premium to the three-year average of 2.7.
Consequently, it may be prudent for current shareholders to consider reducing their exposure to Apple, particularly those with large investments in the company. Prospective investors should also refrain from purchasing Apple stock until a more cost-effective entry point arises.
Should investors sideline the stock market?
In 2024, Berkshire has been a net seller of stocks, with net sales exceeding $127 billion during the nine-month period ending in September. Berkshire offloaded over 600 million shares of Apple year to date, surpassing the company's previous record net stock sales of $25 billion per year.
Moreover, Berkshire reported record-breaking cash and U.S. Treasury bills on its balance sheet at the end of the third quarter, amounting to $325 billion. The combination of intense net stock sales and a massive cash position indicates that Buffet is finding it challenging to locate inexpensive investment opportunities in the current market conditions.
Indeed, the S&P 500 is currently trading at 21.3 times forward earnings, exceeding the five-year average of 19.6 times forward earnings and the ten-year average of 18.1 times forward earnings. This high valuation ratio suggests that the stock market is currently expensive, indicating that investors should exercise caution in the current environment.
However, interpretating Buffet's capital allocation decisions as a total avoidance of stocks may be misleading. Berkshire has limited investment options since purchasing shares of smaller companies would not significantly impact its bottom line. Buffet himself acknowledged this in his last shareholder letter, stating that there are few companies in the United States that could significantly impact Berkshire.
Buffet's decision to sell Apple shares and abstain from buying back Berkshire shares in the third quarter suggests his belief that the stocks are overpriced at the moment. The high valuation ratio of the S&P 500 compared to its average also indicates that the stock market is expensive, which might warrant caution from investors.