Is It Time to Consider Buying Berkshire Hathaway Stock?

Berkshire Hathaway (BRK.B) is a major player in the investment world, thanks in large part to its famous CEO, Warren Buffett. Investors closely watch the company's earnings because Buffett is known for his exceptional investment skills. Unlike most companies that report their earnings on weekdays, Berkshire releases its results during weekends. This timing gives investors extra time to analyze the information. Buffett also prefers to engage with shareholders once a year at the annual meeting instead of conducting quarterly conference calls.

With that context in mind, let’s examine some important insights from Berkshire's third-quarter results to understand its stock performance and Buffett's outlook on the market.

Stockpiling Cash

One significant trend in Berkshire's third-quarter report is the company’s strategy of accumulating cash. Recently, Buffett has been reducing his investments in major holdings such as Apple (NASDAQ: AAPL) and Bank of America. In the latest quarter, he sold 100 million shares of Apple, leaving Berkshire with a total of 300 million shares.

During the May annual meeting, Buffett praised Coca-Cola and American Express as excellent investments, yet he deemed Apple even better. The recent decrease in Berkshire’s Apple shares might have surprised some investors. However, Apple faces risks following the government’s antitrust win against Alphabet, which involved its exclusive search deal with Apple. This arrangement has been a key revenue source for Apple, and any change could have significant implications, although the final outcome remains uncertain.

Given these concerns, Buffett might be cautious about maintaining a large position in Apple, leading him to cut back significantly. His stake was reduced by half in the second quarter and by another 25% in Q3.

Additionally, Berkshire sold $9 billion of Bank of America stock, continuing the trend of decreasing this investment. Overall, Berkshire sold $36.1 billion in stock during the quarter while only purchasing $1.5 billion in new investments. Together with $10.1 billion in operating profits, this brought Berkshire's cash and short-term investments to a staggering $325.1 billion. This amount has increased from $167.6 billion at the end of the previous year.

Noteworthy is the fact that, despite amassing a substantial cash reserve, Buffett opted not to repurchase any of Berkshire’s shares in the past quarter. Historically, buybacks are entirely at Buffett's discretion, and he had already reduced buyback amounts significantly in Q2. In Q1, Berkshire repurchased $2.6 billion in shares, but this fell to $345 million in Q2. The last quarter marks the first time since 2018 that the company has not repurchased its own stock.

Market Valuation Concerns

Buffett has not explicitly commented on the market’s state, yet his actions seem to convey a message. By trimming top holdings, limiting investment activity, accumulating cash, and halting buybacks, it appears that Buffett views both the market and Berkshire stock as potentially overvalued.

Currently, Berkshire is trading at about 1.6 times its price-to-book (P/B) value, along with a forward price-to-earnings (P/E) ratio of 22 based on next year's projected earnings. Buffett has previously used the P/B ratio as a guide for stock buybacks, initially setting a threshold at 1.1 times but later raising it to 1.2 times before eventually dropping it. He believes that neither P/B nor P/E alone accurately reflects intrinsic value.

Despite this, both metrics are reaching historic highs for Berkshire, and Buffett's cessation of buybacks for the first time in over five years suggests caution on his part.

Given Buffett's apparent skepticism about Berkshire's stock being overpriced, this could be a signal for investors to hold off on buying at current levels. While it remains a solid long-term investment, it seems that the stock may have outpaced its actual value.

Regarding the broader market, I wouldn't adopt a bearish stance just yet. Although the market is hovering near all-time highs, historical data indicates that we are still early in the typical duration of a bull market. Moreover, advancements in artificial intelligence (AI) could significantly benefit the market in the coming years. Buffett, despite his many strengths, has not typically excelled in tech investments, having largely avoided a sector that has yielded significant rewards in the last decade, with Apple being a notable exception.

Berkshire, Buffett, Investing