Assessing Berkshire Hathaway: Is It a Good Time to Invest?

Berkshire Hathaway, led by its legendary CEO Warren Buffett, consistently attracts investor attention, especially during its earnings announcements. Unlike typical corporations, Berkshire releases its financial results over the weekend, allowing investors ample time to analyze the information. Buffett prefers to engage with shareholders annually at the company's meeting instead of holding quarterly earnings calls.

Given this unique context, let's explore some important insights from Berkshire's Q3 earnings report to better understand the current state of the company and Buffett's perspective on the financial market.

Increasing Cash Reserves

A key highlight from Berkshire's recent report is its strategy of accumulating cash. Buffett has been actively reducing his holdings in major investments such as Apple and Bank of America. In the last quarter, he sold 100 million shares of Apple, leaving the company with a total of 300 million shares.

At Berkshire's annual meeting earlier this year, Buffett referred to long-standing investments like Coca-Cola and American Express as outstanding businesses, but he ranked Apple even higher. The recent share reduction, however, may have surprised some investors. This is partly due to Apple's exposure to potential risks stemming from a government antitrust case against Alphabet, which focuses on Apple’s exclusive search agreement with them. This deal has contributed significantly to Apple's revenue, but its future now hangs in uncertainty.

In light of this risk, Buffett seems to be scaling back his sizeable Apple investment. In the second quarter, he already reduced his stake by 50%, and the recent quarter saw another 25% cut.

In addition to Apple's shares, Berkshire offloaded $9 billion worth of Bank of America stock, continuing a pattern of cutting back on its holdings. Overall, Berkshire sold $36.1 billion in stock during the quarter while acquiring only $1.5 billion. Coupled with operating profits of $10.1 billion during this period, Berkshire's cash and short-term investments have skyrocketed to an impressive $325.1 billion. This is a significant increase from $167.6 billion earlier this year.

What's also noteworthy is that despite the growing cash stash, Buffett chose not to buy back any Berkshire shares this quarter. He has previously indicated that share repurchases are entirely discretionary. In the first quarter of the year, Berkshire repurchased $2.6 billion worth of its own shares; this figure fell to $345 million in the second quarter. The last quarter marked the first time since 2018 that Berkshire did not repurchase shares at all.

Market Valuation Concerns

Although Buffett hasn’t directly commented on market conditions, his actions suggest he may be adopting a cautious stance. The combination of selling down significant investments, avoiding new acquisitions, building cash reserves, and forgoing stock buybacks all point towards his potential concerns regarding market valuations.

From a valuation perspective, Berkshire currently trades at approximately 1.6 times its price-to-book (P/B) value and shows a forward price-to-earnings (P/E) ratio of around 22 based on analyst projections for the coming year. Historically, Buffett has considered the P/B metric as a benchmark for share repurchases, initially setting a threshold of 1.1 times, moving it to 1.2 times, and ultimately abandoning it due to concerns that these figures alone do not accurately reflect intrinsic value.

Despite this, both the P/B and P/E ratios hover near historic highs for Berkshire. The cessation of share repurchases for the first time in more than five years raises questions about the current valuation.

Given that Buffett seems to assess Berkshire's stock as potentially overvalued, it may be prudent for investors to refrain from buying at this time. While Berkshire represents a well-established long-term investment, it appears to have surpassed its true worth at the moment.

Regarding the broader market, I am not inclined to adopt a bearish outlook. Even though the market is approaching all-time highs, we might still be at an early stage in this bull market cycle.

Furthermore, advancements in artificial intelligence (AI) are likely to be transformative for the economy, potentially driving market growth for years to come. Despite his many strengths as an investor, Buffett has historically not excelled in the technology sector, as evidenced by his cautious approach, especially beyond Apple, a company that he has actively engaged with financially.

Berkshire, Buffett, Investing