Warren Buffett has urged caution with the surging stock market as he extends his selling rally.
Berkshire Hathaway Inc., owned by Buffett, was a net seller of shares for the fourth consecutive quarter. This trend has not been seen since 2008. During the period the company sold nearly $2 billion more in equities than what it bought, adding to its cash reserves that grew to a record $149.2 billion.
The selling streak shows that Buffett has been battling to find bargains as the stock market is at all-time highs. The conglomerate has also not managed a splashy, big acquisition, as the 91-year old billionaire investor and his investing assistants confronted a combination of fierce competition and sky-high price tags from a slew of special purpose acquisition companies.
An analyst at Edward Jones, Jim Shanahan, said the biggest issue was however that Berkshire was a net seller of stocks in the quarter and that was the main reason the cash reserves continued to rise.
According to its Q3 regulatory filing recently released, it seems like Berkshire’s sales have largely been the result of cutting holdings in financial investments, insurance, and banks. Berkshire has been reducing specific stocks recently, spending Q2 paring its investment in General Motors Co. and reducing some of its pharmaceutical bets. The company is set to release its tweaks for Q3 stock later in the year.
Although Buffett has been consistently selling in the last four quarters, these sales have been relatively small versus the huge size of his stock portfolio. Over the last 9 months, he has sold nearly $7 billion more stocks than what he has bought, about 2.2% of Berkshire’s stock portfolio’s fair value at the end of Sept.
In May Buffett warned investors that the company may not be able to strike deals as SPACs enthralled the market, although he also said the boom would likely not last long. The challenge was compounded by his most recent large acquisition, the $37 billion deal 5 years ago for Precision Castparts that resulted in a write-down that Buffett squarely took responsibility for.
Berkshire isn’t the only company extending its cash reserves amid the pandemic. American Airlines Group Inc., Alphabet Inc., and Amazon.com Inc. were some of the companies that accumulated significant holdings during the crisis, and analysts believe this would likely result in some acquisitions.
According to investors, an increasing cash pile is however better than the alternative, including Darren Pollock from Cheviot Value Management. Although Buffett’s cash reserve increased to a record in spite of the $7.6 billion of buybacks in Q3, according to Pollock it’s a good sign about Berkshire’s health.
Pollock, whose company owns Berkshire shares, says they’re happy with it because if the cash wasn’t growing as much, it would mean that the operating companies of Berkshire weren’t of as high quality as they thought. As the cash is rising, means he’s deploying a lot in one avenue which happens to not be acquisitions but buybacks and it’s being spent productively. This is much better than seeing that cash decline or stabilize without other big acquisitions.
Below are some key takeaways from Berkshire’s Q3 earnings:
BNSF, Berkshire’s railroad, has shown record profit and strong earnings. Its operating profit was raised by 18% in the third quarter, helped by the energy businesses at the conglomerate.
That also helped offset the loss-making quarter for insurers in the group. These businesses reported an underwriting loss that increased to $784 million on worsening claims trends at Geico, the auto insurer and increasing catastrophe costs.
Buffett has continued to use share buybacks as a way to utilize billions of dollars. He has used around $51 billion on stock buybacks since 2018 when policy was tweaked and outpaced the $31 billion utilized to buy shares of Apple Inc., the biggest stock bet by Berkshire.
Berkshire bought back $7.6 billion of equities in the third quarter, more than the $6 billion of shares repurchased in Q2.