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

Warren Buffett is widely recognized as one of the greatest investors of all time, making Berkshire Hathaway (BRK.B) one of the most closely scrutinized companies in the market. Berkshire's earnings reports are particularly interesting because they are released on weekends, allowing investors ample time to analyze the results without the rush of a weekday announcement. Unlike many other firms, Buffett does not conduct quarterly earnings calls; instead, he holds an annual meeting for shareholders, where he shares insights about the company's direction and market conditions.

In this context, let’s explore some critical insights from Berkshire's third-quarter earnings report to understand the state of its stock and Buffett's outlook on the market.

Stockpiling Cash

A key highlight from Berkshire's Q3 report is the significant cash accumulation by Buffett and his team. Throughout the quarter, they have been reducing their stakes in major investments such as Apple (NASDAQ: AAPL) and Bank of America. Notably, Buffett sold 100 million shares of Apple, leaving Berkshire with a remaining total of 300 million shares.

During an earlier investor meeting in May, Buffett praised classic holdings like Coca-Cola and American Express but termed Apple as a superior investment. The decision to reduce Berkshire's stake in Apple could indicate concern over potential risks, especially after a recent antitrust ruling against Alphabet. This ruling could threaten Apple’s profitable revenue stream generated from a search deal with Alphabet, although the ultimate implications of this decision remain uncertain.

In the same vein, Berkshire also divested $9 billion worth of Bank of America shares, continuing a pattern of trimming down this stake. Overall, the conglomerate sold approximately $36.1 billion in stock during the quarter, while purchases amounted to only $1.5 billion. Coupled with operating profits of $10.1 billion, Berkshire finished the quarter with an impressive cash and short-term investments total of $325.1 billion—significantly up from $167.6 billion by the end of 2022.

Interestingly, despite the large cash reserves, Buffett did not opt to repurchase any Berkshire shares during this quarter. Historically, share buybacks are at Buffett's discretion, and the amount he has spent on repurchases has been declining. In Q1 of this year, $2.6 billion was spent on buybacks, compared to only $345 million in Q2. The last quarter marks the first instance since 2018 that Berkshire abstained from repurchasing its own shares entirely.

Is the Market Overvalued?

While Buffett has not explicitly commented on the market's current status, his recent actions suggest a cautious stance. The combination of offloading significant positions, a lack of investment activity, an increasing cash reserve, and halting share buybacks implies that he might view both the market and Berkshire's stock as overvalued.

Looking at valuation metrics, Berkshire currently trades at around 1.6 times its price-to-book (P/B) ratio and has a forward price-to-earnings (P/E) ratio of about 22 based on next year’s analyst estimates. Historically, Buffett has utilized the P/B ratio to assess share repurchase decisions, initially maintaining a threshold of 1.1 times, later adjusted to 1.2 times, before eventually deciding that relying solely on these metrics does not provide a full picture of intrinsic value.

Despite this, both P/B and P/E ratios are near their historical highs for Berkshire, while the decision to halt buybacks for the first time in over five years sends a strong signal about current valuations.

If Buffett indeed believes that Berkshire stock might be overvalued, it may be prudent for investors to refrain from purchasing shares at this time. While Berkshire remains a solid long-term investment, it may have gotten ahead of itself in pricing.

Regarding the broader market, a bearish outlook seems unwarranted. While the market is approaching all-time highs, it is still relatively early in the lifecycle of a typical bull market. Furthermore, advancements in artificial intelligence (AI) are emerging as a transformative technology, likely propelling market growth in the years to come. Buffett, though wise in many respects, has not traditionally excelled in tech investing. Outside of his Apple investment, he has largely avoided a sector that has been home to many of today’s top-performing companies.

Berkshire, Stock, Market