Is It Time to Buy Berkshire Hathaway Stock as the Company Builds Its Cash Stockpile?

Berkshire Hathaway, led by the renowned investor Warren Buffett, is a company that attracts significant attention when it reports its earnings. Unlike many corporations, Berkshire chooses to announce its results on weekends, allowing investors ample time to consider the numbers. Furthermore, instead of the typical quarterly earnings calls, Buffett prefers to meet shareholders once a year at their annual meeting.

In light of this, it is essential to examine key insights from Berkshire's most recent third-quarter results to understand the current state of the company and Buffett's perspective on the stock market.

Stockpiling Cash

A notable aspect of Berkshire's Q3 report is the substantial increase in cash reserves. The company has been reducing its holdings in major investments, including Apple and Bank of America. In the latest quarter, Buffett sold 100 million shares of Apple, leaving Berkshire with a total of 300 million shares.

During the annual meeting held in May, Buffett referred to long-standing investments in companies like Coca-Cola and American Express as "wonderful" but stated that Apple was even more impressive. The drastic reduction in Apple shares may have surprised some investors, especially given the looming potential risks Apple faces, particularly after the government's antitrust victory against Alphabet, which could jeopardize Apple's lucrative search deal with Alphabet. This deal has been a significant source of high-margin revenue for Apple, and while its future remains uncertain, it is understandable that Buffett may be trimming his position in light of these risks. After cutting his stake by 50% in the second quarter, his Q3 sales reduced it by another 25%.

In addition to Apple, Berkshire also sold $9 billion worth of Bank of America shares, consistent with its strategy of trimming significant holdings. Overall, the company divested $36.1 billion in stock during the quarter while only acquiring $1.5 billion. Coupled with $10.1 billion in operating profits for the quarter, Berkshire's cash and short-term investments now amount to an astounding $325.1 billion, a significant rise from $167.6 billion at the close of 2023.

Interestingly, despite accumulating such a substantial cash position, Buffett chose not to repurchase any Berkshire shares during the quarter. Historically, Buffett has been selective with share buybacks, and in Q2, he drastically reduced the amount of stock he repurchased. In the first quarter, Berkshire repurchased $2.6 billion worth of shares; by Q2, this figure fell to just $345 million. The third quarter marked the first time since 2018 that Berkshire did not buy back its stock.

Is The Market Overvalued?

Although Buffett has yet to comment specifically on market conditions, his recent actions suggest he may view the market as overvalued. By reducing stakes in top holdings, engaging in minimal buying activity, hoarding cash, and abstaining from share repurchases, it appears Buffett might believe that both the overall market and Berkshire’s stock are priced too high.

From a valuation perspective, Berkshire’s shares are currently trading at about 1.6 times price-to-book (P/B) and have a forward price-to-earnings (P/E) ratio of 22, based on next year's forecasted earnings. Buffett used to reference P/B as a guideline for share buybacks, initially setting a threshold of 1.1 times and later adjusting it to 1.2 times. However, he eventually moved away from using these metrics as a sole indicator of intrinsic value.

At present, both P/B and P/E ratios are nearing historical highs for Berkshire, and the recent pause in share repurchases signals caution.

Given that Buffett seems to believe that Berkshire's stock might be overvalued, it may be wise not to invest in it at the current price levels. While Berkshire Hathaway remains a strong long-term investment, it appears to be outpacing realistic valuations at the moment.

Regarding the broader market, I do not advise a bearish stance. Although the market is hovering near all-time highs, we are still relatively early in the cycle of this bull market.

Moreover, the emergence of innovative technologies, especially in artificial intelligence (AI), has the potential to drive market growth for many years to come. It’s worth noting that while Buffett possesses many investing strengths, he has not excelled in technology investments. Except for Apple, his portfolio largely avoids a sector that has produced significant winners over the past two decades.

Berkshire, Buffett, Market