The world's most famous value investor isn't seeing much value in stocks at record highs.
Warren Buffett's Berkshire Hathaway sold US$1 billion ($1.5b) more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017. Buffett had been an active buyer of equities every quarter last year, including almost $13b in the third quarter alone.
Buffett hasn't had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire's own stock in the second quarter. The result was that the company's cash pile -- a major focus for investors in recent years -- surged to a record $122b.
"It would be hard to look at the cash balance and their uses of cash in recent quarters and not be disappointed that they haven't bought any companies, they haven't bought much stock, and they haven't bought back a lot of their own stock," Jim Shanahan, an analyst at Edward Jones, said in a phone interview Saturday.
The growing cash pile is a reflection of the strength of the operating businesses that Buffett has assembled under one roof, and allows the investor flexibility to move quickly when big deals emerge. But Buffett has acknowledged that having more than $100b earn little return for several years weighs on the company's growth.
Buffett, 88, earned his legendary status by consistently outperforming the broader market, but Berkshire's total return has trailed the S&P 500 over the last five, 10 and 15 years. That's raised questions of whether Berkshire has grown too large to generate excess returns, and whether the cash would be better off returned to shareholders than left for his eventual successor to pursue a major deal.
Buffett has tried to get ahead of those concerns, spending his last few annual meetings and letters to shareholders extolling the value of keeping Berkshire together as a conglomerate and maintaining the company's status as the first call for unique opportunities.
Some of the cash pile is set to be put to work soon. Berkshire agreed to inject $10b of preferred equity in Occidental Petroleum Corp. to help finance an acquisition of Anadarko Petroleum, a deal that will be completed if Anadarko shareholders approve the merger later this month.
Last year, Buffett said prices for deals were too high for his liking, so he turned to building a huge stake in Apple Inc., spending more than $15b on the tech giant's shares. He also bulked up on banks and airlines, but the stakes in many of those companies are now near the 10 per cent ownership threshold that he's said he prefers not to cross.
Berkshire's $400 million of buybacks in the quarter was down from $1.7b in the first three months of the year. That total fell short of the $1.5b expected by Barclays analysts. Berkshire's board changed its buyback policy last year as another way to deploy the mammoth cash pile, but Buffett has kept buybacks relatively limited, only repurchasing a total of $3.4b since the policy tweak. JPMorgan Chase & Co, the closest financial firm to Berkshire in market value, has bought back about $20b in that time.
The stock market's march higher is limiting Buffett's opportunities, but it has pushed his stock portfolio above $200b in value and driven higher earnings. New accounting rules cause unrealised gains to be included in profit, so the company's $7.9b in investment gains drove net income to a 17 per cent jump.
There are other tangible benefits to the company of higher markets, beyond the gains on its stock portfolio. Berkshire had almost $1b in gains in the first half of 2019 on put options it wrote on several equity indexes more than a decade ago, almost half of which expire this year.
Still, investors aren't rewarding Berkshire for its stock bets paying off. While the S&P 500 has surged 17 per cent this year, Berkshire's Class A shares are exactly unchanged.
Highlights from the results
• Berkshire's operating earnings fell 11 per cent to $6.14b during the second quarter as underwriting income at Berkshire's insurers fell by almost 63 per cent to $353m. Auto insurer Geico reported higher losses and expenses, partly due to advertising and employee costs. The life and health business at Berkshire's namesake reinsurance group changed a contract with a major US reinsurer, which reduced the earned premiums it raked in.
• Buffett's railroad eked out profit gains in the quarter, bolstered by shipments of industrial products. That could help bat down concerns about its ability to weather a slowdown in the sector.
• Kraft Heinz was once again missing from Berkshire's results. Kraft Heinz, which is set to report results on August 8, installed a new chief executive officer and finally issued its delayed 10-K filing in June as it worked to clean up from a $15.4b writedown. The restatements in June caused a $34m hit for Berkshire, it said Saturday.