Berkshire Hathaway CEO warren Buffett and his successor Greg Abel they don’t seem convinced about the value of U.S. stocks. Between Q1 2022 and Q2 2024, the pair of investors sold billions of dollars from Berkshire’s core stock holdingscausing the company’s liquidity to swell 161% to $276.9 billion. The trend continued in the third quarter.
Berkshire sold 150.1 million shares of Bank of America worth $6.2 billion of dollars since July 17, SEC filings show, reducing its holdings in the bank by 14.5%. After the sale, Berkshire remains Bank of America’s largest shareholder, with an 11.4% stake worth about $36 billion. But the conglomerate’s $90 billion in total share sales in the first half of 2024, followed by more large-scale selloffs this year, have some investors concerned.
Speculation abounds about why Buffett is selling off many of his top stock holdings. Some say the billionaire investor is responding to high valuations, hoarding cash for a big acquisition, or even bracing for a recession or market downturn.
Haruki Toyamaa portfolio manager and head of Madison Investments’ mid- and large-cap team, said he doesn’t see Buffett’s stock selloff as an explicit call for the market to go lower. Toyama said Berkshire’s moves to raise cash shouldn’t be completely ignored, but they could be a sign that Buffett and company believe the stock is at least moderately overvalued.
In this regard, the famous “Buffett indicator,” which compares U.S. GDP to total stock market capitalization to measure the relative value of stocks, is now more than two standard deviations above its historical average, typically a sign that stocks are generously valued.
Historically, when Berkshire has dramatically increased its cash position, it has also signaled tough times. “If you go back, the last time Berkshire had this much cash relative to book value was before the financial crisis,” Toyama said. “So you can think that maybe Buffett is thinking a little bit more about risk.”
Why is Buffett selling Bank of America stock?
Deciphering the real reasons behind Berkshire’s market moves is always difficult, but Toyama offered some insights into why Bank of America was cut.
First, with markets nearing their peak and stocks trading at a high valuation according to the indicator, Buffett might just manage risk by locking in profits. “Bank of America stock has done quite well since he bought it,” Toyama noted.
Berkshire first bought Bank of America stock in the second quarter of 2007, just before the global financial crisis. It wasn’t the best timing. Buffett and company paid $50.61 a share for their first taste of the bank, and the stock currently trades around $40 a share.
However, Buffett’s willingness to support Bank of America during the dark days of the financial crisis helped turn his initial bet into a success. Berkshire bought hundreds of millions of shares of Bank of America as the bank’s stock price fell before the global financial crisis, with the largest purchase of 679 million shares when Bank of America stock hit $24.27.
Then, in 2011, when banks were still reeling from losses suffered after the subprime mortgage crisis, Buffett bought $5 billion in BofA preferred stock and warrants, believing that the bank would not need additional cash to cover its exposure to distressed mortgages like some of its peers, and that his investment would quickly become profitable.
Buffett finally converted his warrants in 2017, after BofA recovered, making Berkshire the bank’s largest shareholder for the first time. He told CNBC at the time that it would be “a long time” before he sold. Berkshire’s cost basis for its Bank of America holdings is now just $14.15 per share, meaning the conglomerate has sizable profits on its balance sheet, just as Buffett predicted more than a decade ago.
In recent years Buffett has sought to reduce the risk of his portfolio after strong market returns. Berkshire sold its entire position in chipmaker Taiwan Semiconductor in 2023 and trimmed its stake in Chinese electric vehicle giant BYD this year. In total, the conglomerate sold $90 billion in shares in the first half of 2024 as it looks to reduce risk, including more than half its stake in Apple. “I think he’s thinking about that with other banks,” he said.
Toyama noted that rising interest rates have made banks less attractive on a relative basis, with risk-free assets like Treasuries now yielding about 5% from near-zero levels not long ago. Buffett also expressed displeasure with the way many banks have managed their securities portfolios in recent years, particularly after the collapse of several regional banks last year, including Silicon Valley Bankdue to their decision to buy long-dated Treasuries in an environment of rising rates.
“Of course he never singled out Bank of America specifically. But I think you could say in general that he was disappointed in the banks as a whole, in the way they behaved: being out of the guaranteed portfolio a little too long, taking too much risk on interest rates,” Toyama said.
Buffett has recently sold other bank stocks, Toyama noted. After selling his entire stake in Wells Fargo In 2021, Berkshire sold 21%, or 2.65 million shares, of its stake in Capital Onemaking a strong profit.
While some investors may worry that Berkshire’s share selloff means a stock market crash is coming, Toyama said he doesn’t believe that’s the real message. He noted that if Buffett is selling stocks because he senses a crash is coming, financial stocks aren’t the most logical place to sell. Bank of America currently trades at just 14.2 times earnings, well below the 24 times earnings of the entire S&P 500.
“If you’re concerned about expensive stocks in general, banks are certainly not at the top of the list: they’re trading at 10, 11, 12 times current earnings,” he said.
The original article is available on Fortune.com