Wealth managers offer their opinions about the action swirling around the trillion dollar financial giant.
Pardon the interruption, but is anybody paying attention to Berkshire Hathaway? Because there sure seems to be a whole lot of mishegoss happening over there.
With Wall Street keeping a strict gaze on the navels of Fed Chairman Jerome Powell for inklings about the next rate hike and AI-chipmaker Nvidia (Ticker: NVDA) for clues about everything else, the financial world seems to be missing, or perhaps ignoring, all the action taking place at Warren Buffett’s trillion-dollar conglomerate including insider sales, major portfolio maneuverings and a jittery stock price (yes, all $672,000 per A share of it).
Last week, Berkshire’s stock sank over 3 percent while the S&P 500 index was up over 3 percent. The selloff may have been triggered by Vice Chairman Ajit Jain’s reported sale of $139 million of Berkshire stock, over half his entire stake in the company. Jain’s sale may have been due to estate planning ahead of potentially higher tax rates ahead.
Then again, the selloff could very well have been accelerated by the fact that the stock was trading at 1.7 times its book value, a 5-year high. Furthermore, Warren Buffett did turn 94 on August 30th if that means anything to the Buffettologists out there. So it’s not entirely known why the stock faced so much pressure last week.
What is clear, however, is that Warren Buffett and his team have not been buying back much Berkshire stock of late. In fact, they’ve been spending most of 2024 selling some of their favorite names. In the first two quarters of 2024, for example, Berkshire reduced its Apple holdings by over 50 percent. And then they sold a major slab of Bank of America shares this past summer, slimming their stake to 11 percent.
So seriously folks, what in the name of the Oracle of Omaha is going on out here? And should financial advisors be doing anything about it?
Robert Pearl, co-founder and wealth advisor at G&P Financial, currently holds Berkshire Hathaway Class B shares in some client portfolios and does not plan on parting with them anytime soon.
“Berkshire’s cash reserves are substantial, and with current interest rates, they’ve been generating solid returns on that cash. As interest rates begin to decline, I would expect Berkshire to deploy more of its capital into strategic opportunities. The company is well-positioned for future buying opportunities,” said Pearl.
As for its Apple sales, Pearl maintains that the technology giant remains Berkshire Hathaway’s largest holding, and the company has benefitted significantly from Apple’s outstanding performance over the years. Given this strong run, he believes it is reasonable for Berkshire to take some profits at this point.
“Berkshire’s decision to reduce its Apple position and not increase its own stock buybacks likely reflects similar concerns that many investors are recognizing. The largest companies, including Apple and Berkshire, have delivered exceptional performance. However, it’s likely that other sectors of the market will eventually catch up,” said Pearl.
Andrew Graham, founder of Jackson Square Capital, is also staying long the stock – at least for now. In his view, a turn in growth data would cause him to reevaluate the position because “financials perform poorly during a recession.”
“Berkshire’s 13F in June showed around $276B in cash, up from $189B in March. They could be investing the cash as we speak, but the buildup of cash probably says something about valuations given Buffett’s philosophy to ‘be fearful when others are greedy, and greedy when others are fearful,’” said Graham.
He adds that Berkshire’s recent actions likely don’t reflect much about the economy either. He surmises that Buffett could be taking “chips off the table” due to the market trading at over 20 times forward estimates.
Elsewhere, Colin Farr, wealth manager at Savvy Advisors, points out that Berkshire Hathaway stock is up nearly 26 percent year-to-date and has more than doubled in price over the last five years. The significant slowdown in buyback activity, combined with Jain's sales, lead Farr to believe that Jain thinks the stock is fully valued.
“I think Berkshire's recent reductions in their Apple and Bank of America positions can be attributed more to booking profits rather than a hedge against a near term recession,” said Farr.
Furthermore, as a long time Berkshire shareholder with a long term outlook, Farr says he will continue to hold the stock because he believes Warren Buffett when he said in his annual letter that "Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital."
Michael Leverty, founder of Leverty Financial Group, meanwhile, says Berkshire’s actions offer mixed signals. On one hand, its reduced stakes in Apple and Bank of America may indicate that the company is positioning itself more conservatively in the current economic environment. Bank of America's challenges could be related to interest rate volatility, while Apple has faced concerns about supply chains and demand.
"These moves suggest a cautious outlook, especially given the uncertainty in the financial sector and the global economy," said Leverty.
Still, he believes that Warren Buffett’s decision to hold back on buying Berkshire shares also suggest that Berkshire's guiding light doesn’t see the stock as significantly undervalued at current levels.
“Historically, Buffett buys back shares when he believes the market price is well below the company's intrinsic value. The slowdown in buybacks, coupled with Jain’s sale, could indicate that Berkshire’s leadership sees fewer immediate opportunities for significant returns on its own stock,” said Leverty, who does not hold Berkshire shares for clients.
Maggie Bilby, vice president at Cyndeo Wealth Partners, is holding onto her shares because in her view “the fundamentals of the company are intact, coherent and reasonable” despite recent leadership changes between former vice chairman Charlie Munger’s passing in late of 2023 and the recent large sale from Jain.
“Vice Chairman Ajit Jain’s sale on Monday, September 9th, may be a signal of an upcoming retirement,” said Bilby. “Jain is 73 years old and has been with Berkshire for 38 years. It would be reasonable to think that Jain wants to take some chips off the table due to the recent valuation surge and the potential for higher capital gains or corporate taxes.”
