Warren Buffett’s Shifting Strategy: What It Means for Investors
Warren Buffett is often seen as one of the greatest investors in U.S. history. Since he took the helm of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in the mid-1960s, shares have soared more than 5,400,000%. This success is largely attributed to his strategic acquisitions and stock purchases. In comparison, the S&P 500 (SNPINDEX: ^GSPC) has returned about 37,500% during the same period.
Recent Decisions from Buffett’s Desk
Buffett manages 90% of Berkshire’s investment portfolio, while Ted Weschler and Todd Combs oversee the rest. He also has the authority to repurchase Berkshire shares when he finds them undervalued. In the third quarter, Buffett made several notable moves:
- Berkshire sold approximately 100 million shares of Apple (NASDAQ: AAPL), reducing its stake by 67% this year. Despite this, Apple remains the largest investment in Berkshire’s portfolio.
- No stock repurchases occurred during the third quarter, breaking a six-year buyback streak where Buffett invested $78 billion. This indicates he may view Berkshire shares as overvalued.
- This marks Berkshire’s status as a net seller of stocks, with total net sales surpassing $127 billion this year, the most aggressive selling the company has ever undertaken.
This year, Berkshire’s balance sheet shows $325 billion in cash and short-term U.S. Treasury bill investments. The combination of a large cash reserve and significant stock sales suggests Buffett is finding it challenging to identify attractive buying opportunities. Investors should take note.
Apple boasts a significant presence across various consumer electronic categories. It ranks second in smartphone shipments worldwide and leads in actual sales, showcasing strong pricing power. Additionally, the company holds the top spot in smartwatch and tablet shipments, while ranking fourth in personal computer shipments.
Apple’s services segment has been a vital part of its growth. While the company earns once when an iPhone is sold, it continuously generates revenue from services like iCloud, App Store usage, and subscriptions like Apple TV+. This area has higher profit margins and is poised to become Apple’s primary revenue generator over time.
In the fourth quarter of fiscal 2024 (ending September 2024), Apple delivered solid financial results, exceeding revenue expectations. Total revenue climbed 6% to $95 billion, with product sales growing by 4% and services by 12%. Earnings also increased, rising 12% to $1.64 per diluted share.
The major concern for Apple is its valuation. Analysts project earnings to grow at a rate of 10% annually over the next three years, rendering the current valuation of 36.7 times earnings rather pricey. With a PEG ratio of 3.7, significantly higher than the three-year average of 2.7, investors might consider trimming their Apple investments, similar to Buffett’s approach. This is especially relevant for those heavily invested in the company.
Image source: Getty Images.
Should Investors Steer Clear of the Stock Market?
Berkshire Hathaway’s status as a net seller, with net stock sales exceeding $127 billion in 2024, raises questions about market conditions. This aggressive selling is largely attributed to the offloading of over 600 million Apple shares. Historically, Berkshire’s yearly net sales were never higher than $25 billion.
With $325 billion in cash and U.S. Treasury investments, Buffett’s strategy illustrates a cautious approach to finding reasonably priced stocks in the current market. The S&P 500 currently trades at 21.3 times forward earnings, above the five-year average of 19.6 and the ten-year average of 18.1, indicating the market is expensive by historical standards. Investors should tread lightly.
However, it would be premature to see Buffett’s actions as a complete warning to avoid equities. Berkshire faces unique challenges, as investments in smaller companies wouldn’t significantly impact its financials. Buffett noted this in his last shareholder letter, emphasizing the limited companies capable of moving the needle for Berkshire.
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Trevor Jennewine holds no positions in the stocks mentioned. The Motley Fool recommends Apple, Berkshire Hathaway, and FactSet Research Systems. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
