On Wall Street, Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), is an investment icon. Since taking the helm over five decades ago, he has driven his company’s stock price to total gains of over 2,800,000%! On an annualized basis, we are talking about 56 years with an average annual return of 20%.
Suffice it to say that when Buffett and his investment team buy or sell a stock, investors pay close attention to it.
Last week Berkshire Hathaway raised the hood of his wallet by filing Form 13F with the Securities and Exchange Commission. In total, the company Oracle of Omaha took a new position (Aon), added to four existing positions, completely sold on two positions (Synchrony Financial and Suncor Energy), and reduced 11 additional participations in the first quarter.
But that 13F deposit doesn’t tell the whole story of what’s really going on with Buffett’s investment portfolio. Here’s what a deeper dive into tea leaves teaches us about what he’s thinking and where Berkshire Hathaway will go.
Warren Buffett, CEO of Berkshire Hathaway. Image source: The Motley Fool.
Warren Buffett remains skeptical of stock valuation
For people who don’t want to dust off their calculators, let me give you the bad news: Buffett and his team were net sellers of stocks in the first quarter. This means that in three of the last four quarters – Q2 2020, Q4 2020 and now Q1 2021 – Berkshire Hathaway has sold more shares than it has bought, not counting share buybacks.
If you’re wondering why Buffett isn’t chasing one of the strongest rebound rallies in history, the answer is a probable estimate. Its long-term success has come on the back of buying value stocks and paying dividends, not chasing high growth tech stocks.
The problem is, stocks are historically expensive, and it’s hard to find traditional value right now. the S&P 500Shiller Price / Earnings Ratio almost turned 37 on May 20, which is more than double its 151-year average of 16.82. In one context, it has been nearly two decades since the S&P 500’s Shiller P / E ratio was this high.
Buffett also likely has a hard time accurately valuing companies that depend on intangibles and intellectual property. After all, he made a living evaluating bank stocks and consumer goods companies that have durable assets on their balance sheets.
Although Buffett never comes to say it, he’s unlikely to run the bulk of Berkshire Hathaway’s cash flow until stock valuations drop significantly.
Image source: Getty Images.
Wells Fargo broke the golden rule
There are few, if any, investors who are cited more by the financial media and investors than Buffett. You could make novels out of the nuggets of wisdom he spoke at shareholder meetings and talks with networks like CNBC.
Still, there isn’t a lot companies can do to get on Buffett’s bad side. He fully understands that contractions and recessions are an integral part of the business cycle, and he almost always sees these downturns as temporary. In other words, he’s not quick on the trigger to hit the sell button when the businesses he owns are underperforming.
But there is a golden rule which, if not followed, means getting Berkshire Hathaway’s portfolio startup – and Wells fargo (NYSE: WFC) broke it.
Between 2009 and 2016, Wells Fargo opened around 3.5 million unauthorized accounts in an effort to achieve aggressive cross-selling goals at the branch level. The company then paid billions in fines to the US Department of Justice. The problem is that Wells Fargo has violated the trust of its customers and that its management team (which had three CEOs in three years) has betrayed the trust of shareholders. It is no coincidence that Berkshire Hathaway the second oldest participation (32+), which once totaled nearly 480 million shares, has now been reduced to less than one million shares since this scandal became public.
Buffett will tolerate a company that tries to make a turnaround, but he will not represent a company with a tarnished reputation.
Image source: Getty Images.
Buffett continues to cede control to his investor lieutenants
Finally, it became apparent that Warren Buffett has ceded much of the day-to-day control of Berkshire Hathaway’s investment portfolio to his lieutenants, Todd Combs and Ted Weschler.
How do we know this? For starters, 18 of the 48 holdings in Berkshire Hathaway’s portfolio in the first quarter were completely removed, reduced, added or initiated. Historically, a busy quarter with Buffett at the helm would involve a single digit of combined buy and sell.
Also, Buffett is not the kind of investor to slowly reduce stakes in companies he no longer believes in (see Wells Fargo). Yet in the first quarter we saw moderate sales pharmaceutical stocks like Bristol Myers Squibb, AbbVie, and Merck.
To emphasize this point, Warren Buffett tends to buy and hold investments for years. Oil and gas giant Chevron, which was initially added in the fourth quarter, saw its stake reduced by 51% in the first quarter. It’s certainly nothing Buffett would never do.
But the telling evidence is what Berkshire Hathaway bought. For example, Buffett does not have the desire or the time to follow clinical trials and the cliffs of drug exclusivity patents. This means that Berkshire’s surge in drug stocks almost certainly came from Combs and Weschler.
The point is this: the traditional “Buffett wallet” to which we have become accustomed for decades. is now a thing of the past. While maintaining control over basic issues, such as Coca Cola, Apple, and Bank of America, the remainder of Berkshire Hathaway’s portfolio became more actively managed under the watchful eyes of Combs and Weschler. While it is not yet clear what this will mean for future returns, Buffett has unwavering confidence in his investor lieutenants.
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Sean williams owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares and recommends Apple, Berkshire Hathaway (B shares) and Bristol Myers Squibb. The Motley Fool recommends the following options: long January 2023 $ 200 call on Berkshire Hathaway (B shares), long March 2023 $ 120 call on Apple, short January 2023 $ 200 put on Berkshire Hathaway (B shares), short June 2021 $ 240 calls on Berkshire Hathaway (B-Shares), and $ 130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.
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