Warren Buffett is the CEO of the conglomerate Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). Under his leadership, Berkshire stock has delivered a compound annual return of 19.8% since 1965, which would have been enough to turn an investment of $1,000 into a whopping $42 million.
The same investment in the S&P 500 would have grown to just $308,115 over the same period, so it's no surprise Wall Street watches Buffett's every move.
Buffett is on a selling spree this year, which is a sign he might 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 substantial amount of stock.
However, Q3 also marked the first time in six years that Buffett neglected to buy shares in his favorite company -- and that might be triggering some alarm bells on Wall Street.
Image source: The Motley Fool.
Berkshire has slashed its largest position by more than half
Between 2016 and 2023, Berkshire spent approximately $38 billion acquiring shares of Apple (NASDAQ: AAPL), which is the most money the conglomerate has ever invested in any company. That position was worth over $170 billion coming into 2024, meaning Berkshire was sitting on a gain of more than $130 billion.
At that point, Apple represented around half of Berkshire's portfolio of publicly traded stocks and securities. The conglomerate had sold small parcels of Apple stock over the years to lock in gains, but it really ramped up the selling this year.
Berkshire sold 13% of its Apple position in the first quarter, and Buffett said it was for tax reasons. But Berkshire then sold 49% of its remaining Apple shares in the second quarter, with no real explanation. Finally, the conglomerate sold 25% of what was left during the third quarter.
Apple is still Berkshire's largest position at 23.3% of its portfolio, and Buffett says that will remain the case for now. But that isn't the only stock the investment company has trimmed this year.
Berkshire reduced its stake in Bank of America, Capital One Financial, Chevron, T-Mobile, and more. Plus, it sold its entire stakes in HP, Paramount Global, Snowflake, and Floor and Decor Holdings.
In fact, Berkshire is now sitting on a record $325 billion in cash, which suggests Buffett is stockpiling dry powder he can deploy in the event of a market correction.
The S&P 500 is very expensive relative to its history
The S&P 500 is the most diversified of the major U.S. stock market indexes. It has set multiple new record highs this year, extending the raging bull market that began in October 2022. But it's now undeniably expensive when measured by the most widely used valuation metric.
As of this writing, the S&P 500 trades at a price-to-earnings (P/E) ratio of 25.6. That's a 41% premium to its long-term average of 18.1, dating back to when the index was established in the 1950s.
Markets can remain expensive for years, so valuation alone isn't a good reason to sell. However, Buffett's strategy involves buying great companies at a fair price and holding onto them for the long term. He clearly views this period as a good opportunity to book some of the incredible gains Berkshire has earned over the last few years, in preparation for cheaper prices at some point in the future.
Buffett shunned his favorite stock in Q3
There is one stock Buffett bought in every single 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 repurchase of a whopping $77.8 billion worth of Berkshire stock since 2018, which is more than twice the amount the conglomerate invested in Apple. Buybacks are Buffett's preferred way of returning money to shareholders; when Berkshire buys its own stock on the open market, it reduces the number of shares in circulation, which organically increases the price per share.
During the second quarter of 2024, Berkshire only completed $345 million worth of repurchases, which was the smallest amount since this program started six years ago. That was another clear sign of Buffett's cautiousness, but that sign turned into a bright red alarm in the third quarter when he authorized zero repurchases of Berkshire stock:
BRK.A Stock Buybacks (Quarterly) data by YCharts
It was the first time he has shunned his favorite stock since the buyback program started in 2018. It's possible he thinks it's simply too expensive right now. The stock trades at a price-to-sales (P/S) ratio of 2.25, which is a 13% premium to its 10-year average of 1.98:
BRK.A PS Ratio data by YCharts
This probably won't be the end of Berkshire's buyback program. The conglomerate can repurchase stock at management's discretion as long as its cash, equivalents, and holdings in U.S. Treasury securities remain above $30 billion. Since it's sitting on $325 billion in dry powder at the moment, Buffett is likely just waiting for a correction in the stock before resuming buybacks.
Nevertheless, when a trillion-dollar investing giant like Berkshire is dumping truckloads of stock, shunning buybacks, and hoarding cash, it's not a great sign for the broader market. I'm not suggesting investors should rush to sell their stock portfolios, but it's a good idea to be mentally prepared for a potential correction in the S&P 500 over the next year or so.
If we do 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 position in any of the stocks mentioned. The Motley Fool has 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
