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

Berkshire Hathaway, led by renowned investor Warren Buffett, consistently generates interest among investors. Unlike most corporations, Berkshire shares its earnings on weekends, allowing ample time for analysis and insight. Buffett's traditional approach avoids frequent updates, opting instead for a comprehensive annual meeting with shareholders.

In this article, we'll explore the significant developments from Berkshire Hathaway's third-quarter results and what these might indicate about Buffett’s current outlook on the market.

Stockpiling Cash

A striking aspect of Berkshire's Q3 report is Buffett’s increasing cash reserves. The company has been reducing its investments in major holdings such as Apple and Bank of America. During the last quarter, Buffett sold 100 million shares of Apple, reducing Berkshire's total to 300 million shares.

In earlier comments, Buffett praised established investments like Coca-Cola and American Express as excellent opportunities, but he regarded Apple as even more appealing. However, the recent sale of a significant portion of Apple shares may have surprised many analysts. This decision comes amid potential risks related to an antitrust ruling against Alphabet, which could threaten Apple’s lucrative search deal with Alphabet. The full implications remain uncertain, but this risk may influence Buffett’s strategy of trimming his Apple stake both in the second quarter and now in Q3.

Alongside these changes, Berkshire also divested $9 billion of Bank of America shares, continuing a trend of reducing this investment. Overall, the quarter saw Berkshire sell approximately $36.1 billion in stocks while spending only about $1.5 billion on new acquisitions. Coupled with $10.1 billion in operational earnings, this left Berkshire with an impressive $325.1 billion in cash and short-term investments, primarily U.S Treasury Bills. This is a significant increase from $167.6 billion at the end of 2023.

Another noteworthy point is that despite amassing such a considerable cash reserve, Buffett opted not to buy back any Berkshire shares during this quarter. Historically, Buffett has maintained that share repurchases are discretionary. His repurchasing efforts were significantly lower in Q2 than in Q1, where Berkshire bought back $2.6 billion worth of shares. This third quarter marked the first time since 2018 that Berkshire did not repurchase its own stock.

Assessing Market Valuation

While Buffett hasn't made definitive statements about the current market conditions, his actions suggest a cautious stance. The trend of reducing significant holdings, coupled with a pronounced lack of investment activity and stock buybacks, implies that Buffett may believe both the market and Berkshire stock itself are overvalued.

Evaluating Berkshire’s financial worth, we see it opting for a price-to-book (P/B) ratio of about 1.6 and a forward price-to-earnings (P/E) ratio of 22 based on next year's expected earnings. In the past, Buffett used the P/B ratio as a benchmark for buybacks, initially favoring a threshold of 1.1, which was later adjusted to 1.2 before he moved away from such strict measures, mentioning that neither metric alone sufficiently represents a company's true value.

Though these ratios currently reflect historic highs for Berkshire, Buffett's decision to halt share buybacks indicates growing caution. Based on his apparent view that Berkshire may be slightly overvalued, some analysts suggest that investors should refrain from buying shares at this time. Although Berkshire is still a solid long-term investment, many feel the stock may momentarily be priced too high.

Regarding the broader market, I would not adopt a bearish outlook. Even though the market is close to historical peaks, we could still be early in the life cycle of this bull market. Additionally, advancements in artificial intelligence (AI) are expected to drive growth and innovation, potentially benefiting the market in the coming years. Historically, Buffett has not been an avid investor in technology sectors, aside from his Apple investment, often overlooking industries that have produced significant gains recently.

Note: The views expressed in this article do not represent investment advice and should be taken for informational purposes only.

Berkshire, Buffett, cash