Legendary value investor and Berkshire Hathaway (BRK.B) Chairman Warren Buffett has a large fanbase among investors. While his recent performance versus the S&P 500 Index ($SPX) has been underwhelming, with Buffett underperforming the benchmark in three of the last five years, he still commands tremendous respect among investors - and especially value investors.
Berkshire Hathaway’s 13F filing for Q4 2023 revealed that it was a net seller of stocks (i.e., more stock sells than buys) in the quarter. In fact, the conglomerate now has been a net seller of stocks for five straight quarters. Thanks to a combination of strong operating earnings and proceeds from stock sales, Berkshire Hathaway’s cash pile soared to a record high of $167.6 billion at the end of 2023.
With the “Oracle of Omaha” - who is arguably among the best value investors of all time - on a stock selling spree, should other value investors follow suit and sit on cash?
Warren Buffett Goes on a Stock-Selling Spree
Overall, Berkshire was a net seller of stocks to the tune of $24.2 billion last year. The company did repurchase $9.2 billion worth of its shares during the year, and the amount was higher than in 2022, when it spent $7.9 billion on buybacks.
Berkshire was also on a buyback spree between 2020 and 2021, and repurchased over $50 billion worth of its shares between these two years. While the company toned down the repurchases in 2022, it went overboard in deploying that cash in other companies. And 2023 was likely one of those years that Buffett has described as a “nightmare” – specifically, a scenario wherein he finds other stocks expensive, while Berkshire Hathaway shares are fairly valued.
Why Has Buffett Been Selling Shares?
Incidentally, Buffett’s stock selling hasn't been limited to 2023; Berkshire was a net seller of stocks in both 2020 and 2021, too. In both of these years, U.S. stocks delivered strong double-digit returns, even as some market-watchers - and particularly value investors - believed that stocks had run ahead of their fundamentals.
After peaking in 2021, U.S. stocks crashed in 2022, as the tech rally stalled. Buffett, who likes to buy stocks at a discount, went on a buying spree that year. He not only added to Berkshire’s portfolio of publicly traded securities, but also acquired Alleghany Corp. for $11.6 billion.
Scrolling through Buffett’s 2023 annual shareholder letter offers some insights as to why Buffett may be selling shares. In his letter, Buffett says, “One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital.”
He also said, “For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
Ashwath Damodaran Finds “Magnificent 7” Overvalued
Both Buffett and his former partner, Charlie Munger, have lashed out at frenzied trading activity in stocks in the past, as well. Indeed, there has been a buying spree in tech names, and the fear of missing out (FOMO) has inflated valuations for some stocks. Even valuation guru Ashwath Damodaran has weighed in on the valuation of “Magnificent 7” stocks, noting that Microsoft (MSFT) and Nvidia (NVDA) seem particularly overvalued.
Looking at valuation metrics, the forward price-to-earnings (PE) multiple for the S&P 500 is 20.7, which is significantly ahead of the 17.7 that it has averaged over the last 10 years. While the Fed is widely expected to cut rates in 2024 – an event that should support valuations – we still have the global macro slowdown and geopolitical tensions to contend with, which don’t seem to support the current premium.
Should Value Investors Follow Buffett's Lead and Sell Stocks?
For at least five years now, market valuations have not been at levels that value investors might be comfortable with. While there have been aberrations, like in 2022, value investors have had a tough time scouting for opportunities.
That said, although there are signs of overvaluation in broader markets right now, that doesn't necessarily mean that value investors should be selling stocks left, right, and center. Notably, even Berkshire added to its stake in Chevron (CVX), Occidental Petroleum (OXY), and SiriusXM Holdings (SIRI) during Q4, while trimming stakes elsewhere.
I believe that PayPal (PYPL) and Ford (F) are also attractive value plays right now, and trade at a discount to their long-term valuations. For those hunting for dividends, Pfizer (PFE) appears to be another attractive play with a yield over 6%. Looking elsewhere, even Zoom Video Communications (ZM) is now a value stock, with a next 12-months (NTM) PE multiple of around 14x.
Having said that - while there are still some quality names that continue to trade at reasonable valuations, booking some profits and keeping powder dry for a possible correction in markets might be a prudent strategy right now.
On the date of publication, Mohit Oberoi had a position in: BRK.B , TSLA , NVDA , MSFT , PYPL , F , PFE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
