Is Now the Right Time to Invest in Berkshire Hathaway Stock?

Warren Buffett, the CEO of Berkshire Hathaway (BRK.B), is widely regarded as one of the greatest investors of our time. As a result, the company's earnings reports are important events that attract significant attention from investors. Unlike most public companies that release their earnings during the week, Berkshire chooses to do this on weekends, giving stakeholders ample opportunity to analyze the data. Instead of hosting quarterly earnings calls, Buffett opts for a more personal approach by engaging with investors during an annual meeting each May.

With this context in mind, let's take a closer look at some significant findings from Berkshire's third-quarter results, which may shed light on the company's stock and Buffett's potential feelings about the current market conditions.

Building Up Cash Reserves

One noteworthy aspect of Berkshire's Q3 earnings report is the accumulation of cash reserves. Buffett has been selling off portions of some key investments, including Apple and Bank of America. In the most recent quarter, he sold 100 million shares of Apple, reducing Berkshire's holdings to 300 million shares.

During the annual meeting earlier this year, Buffett referred to long-term investments like Coca-Cola and American Express as "wonderful" but emphasized that Apple may be the strongest among them. However, this decision to significantly reduce the Apple stake may have surprised some investors. The tech giant is facing notable risks due to a recent antitrust ruling against Alphabet, which has implications for its exclusive search deal with Apple. This deal has been a lucrative revenue source for Apple, but the long-term consequences of the ruling remain uncertain.

Consequently, it appears that Buffett is strategically reducing his exposure to Apple in light of these potential risks. In addition, Berkshire sold $9 billion worth of stock in Bank of America, continuing a trend of decreasing its stake in this financial institution. Overall, during the quarter, Berkshire disposed of $36.1 billion in stocks while only acquiring $1.5 billion. Coupled with operating profits of $10.1 billion, the company now has a staggering cash and short-term investments balance of $325.1 billion, a significant increase from $167.6 billion at the end of 2022.

Interestingly, despite the growing cash reserves, Buffett chose not to repurchase any shares of Berkshire stock during the quarter. He has emphasized that buybacks are entirely discretionary and that his company has been reducing its buyback activity. In Q1, Berkshire repurchased $2.6 billion worth of shares, but this amount fell to just $345 million in Q2. The lack of buybacks in the most recent quarter marks the first time since 2018 that Berkshire has refrained from repurchasing its stock.

Market Valuation Concerns

While Buffett hasn't spoken publicly about the state of the current market, his actions may provide insights into his outlook. By reducing his major holdings, limiting new investments, stockpiling cash, and halting share repurchases, Buffett may signal that he believes both the market and Berkshire's stock are overvalued.

In terms of valuation, 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 22 based on next year's analyst expectations. Buffett has used the P/B ratio as a yardstick to evaluate share repurchase decisions, originally targeting a threshold of 1.1 before adjusting it to 1.2 and eventually discarding it in favor of a more nuanced view of intrinsic value. However, these metrics are currently at historically high levels for Berkshire, and the pause in share repurchases indicates Buffett's apprehension about the stock's valuation.

Considering Buffett's apparent hesitance regarding Berkshire's stock price, it may be wise not to jump into purchasing shares at the moment. While the company remains a strong long-term investment, it appears to have become slightly overvalued at this juncture.

Regarding the broader market, I wouldn't take a completely bearish stance. Although markets are hovering around all-time highs, we are still early in the typical duration of a bull market. Furthermore, the rise of artificial intelligence (AI) represents a transformative technology that could propel market growth for years to come. However, it is worth noting that Buffett has historically not been known for his technology investments; aside from his stake in Apple, he has largely stayed away from a sector that has delivered substantial returns over the past two decades.

Berkshire, Buffett, Investing