The selling continues at Berkshire Hathaway, with the second-largest holding Warren Buffett oversees being pared down by nearly 33.9 million shares.
Few, if any, billionaire money managers garner attention on Wall Street quite like Warren Buffett. Since becoming CEO of Berkshire Hathaway (BRK.A 1.24%) (BRK.B 1.40%) in 1965, he's overseen an aggregate return in his company's Class A shares of a scorching-hot 5,268,713%, as of the closing bell on July 19. When you're effectively doubling up the annualized total return of the benchmark S&P 500 over nearly six decades, you're going to get noticed.
Investors intently wait for Berkshire Hathaway's quarterly Form 13F filings to spill the beans on what stocks the affably dubbed "Oracle of Omaha" and his investment team have been buying and selling. But for select stocks -- those where Berkshire holds at least a 10% stake -- Buffett is required to show his proverbial hand anytime a move is made.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
On Friday, July 19, Berkshire Hathaway filed a Form 4 with the Securities and Exchange Commission detailing trading activity in one of Buffett's core holdings, Bank of America (BAC 0.91%). BofA, as Bank of America is more commonly known, has been Berkshire's second-largest holding by market value for years, trailing only Apple (AAPL 0.20%).
Although Buffett and his top investment advisors (Todd Combs and Ted Weschler) entered 2024 with a little over 1.03 billion shares of BofA held in Berkshire Hathaway's portfolio, this isn't the case any longer. From July 17 through July 19, Berkshire's brightest investment minds sold 33,890,927 shares of Bank of America stock, totaling $1.476 billion.
While this sale represents a relatively small percentage of one of Buffett's core holdings -- Bank of America still accounts for almost $43 billion of invested assets in Berkshire's 44-stock, $407 billion investment portfolio -- there are a multitude of subtle reasons this $1.48 billion share sale makes complete sense.
1. Buffett's $56 billion silent warning implies stocks are pricey
To begin with, the Oracle of Omaha hasn't been shy about his belief that the stock market is pricey. Though neither he nor his investing "lieutenants" would ever bet against the American economy, Berkshire investment team has been a net-seller of equities for six consecutive quarters. Between Oct. 1, 2022 and March 31, 2024, Berkshire Hathaway's cash flow statements show $56.09 billion in net-equity sales.
S&P 500 Shiller CAPE Ratio data by YCharts.
What's more, data shows that the stock market is historically pricey. The S&P 500's Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted price-to-earnings ratio, or CAPE ratio, ended July 19 at a reading of 35.5. This is more than double its 153-year average of 17.14, and the third-highest reading during a continuous bull market when back-tested to 1871.
While it's impossible to predict when stock market corrections and bear markets will begin, history tells us that extended valuations aren't well-tolerated for lengthy periods on Wall Street.
During Berkshire Hathaway's annual shareholder meeting in May, where the company's first-quarter operating results revealed it had an all-time record $189 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, Buffett opined that his company's cash pile could approach $200 billion in the second quarter. In other words, opportunities to raise cash in a pricey market by selling stock are on Buffett's radar.
2. Bank of America is no longer a screaming bargain, relative to its book value
Warren Buffett selling $1.48 billion of Bank of America stock also makes sense because BofA is no longer the screaming bargain that it's been for much of the last 15 years.
On one hand, Bank of America's book value has been moving higher, which is precisely what you'd want to see from a time-tested business that benefits from long-winded periods of economic growth.
BAC Price to Book Value data by YCharts.
However, its share price has been rising at an even faster pace. When Buffett and Co. sold shares of BofA last week, they were doing so at a 26% to 28% premium to the company's book value of $34.39 per share. While this isn't egregiously expensive, Bank of America stock has traded below its book value for much of the last 15 years.
A premium to book value of around 30% has also marked a top for BofA's stock on numerous occasions since the start of 2018.
Though Bank of America stock isn't expensive by any means, it's also not the phenomenal bargain it was as recently as late October.
3. BofA's buybacks may have warranted an adjustment by Berkshire's investment team
The third subtle reason that might justify why Buffett dumped close to $1.5 billion worth of Berkshire's second-largest holding is share buybacks.
When the U.S. economy is firing on all cylinders, money-center banks are known for rewarding their shareholders with hearty capital-return programs. When given the green light by the Federal Reserve, Bank of America has been known to return in excess of $20 billion annually to its shareholders via dividends and share buybacks (on a combined basis).
BAC Shares Outstanding data by YCharts.
Since the start of 2018, a steady stream of share repurchases has allowed BofA to reduce its outstanding share count by 24.42%, including a 2.16% reduction over the trailing year. These buybacks are incrementally increasing Berkshire's stake in Bank of America without the Oracle of Omaha or his team having to lift a finger.
Berkshire Hathaway's stake in Bank of America can increase to as much as 24.9%, per the Federal Reserve Bank of Richmond, without it being considered a bank holding company -- and its current stake is nowhere near this level (12.8%, as of July 19). However, Buffett may have preferred to keep his company's stake in BofA below 13%. In other words, Bank of America's continued buybacks may have coerced Buffett's decision to sell 33.89 million shares.
Image source: Getty Images.
4. A historically favorable corporate tax rate encouraged profit-taking
The fourth logical reason the Oracle of Omaha may have chosen to part ways with almost $1.5 billion worth of Bank of America stock is tax related.
During the first quarter, Buffett and his crew sold more than 116 million shares of tech stock Apple, equating to roughly 12.8% of Berkshire's stake, as of December 31. During Berkshire Hathaway's annual shareholder meeting, Buffett had the following to say about selling Apple stock and the current corporate tax rate:
We don't mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we're taking in Apple. And that rate was 35% not that long ago, and it's been 52% in the past when I've been operating... [I] would say, with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely.
In other words, Buffett justified locking in gains in Apple because the corporate tax rate is making it advantageous to do so. With his company also sitting on massive unrealized gains with its BofA position, it might make sense to take some profit off the table while corporate tax rates are still favorable.
5. A shift in monetary policy may adversely impact Bank of America's net interest income
A fifth and final subtle reason Warren Buffett and his top aides sent nearly 33.9 million shares of Bank of America to the chopping block may have to do with an expected shift in Federal Reserve monetary policy.
In March 2022, the nation's central bank kicked off its most-aggressive rate-hiking cycle since the early 1980s. While higher interest rates have been a positive for virtually all bank stocks, no money-center bank is more interest-sensitive than Bank of America. Increasing the federal funds target rate by 525 basis points in a little over a year added billions of dollars in net interest income to BofA's bottom line each quarter.
Although core inflation (which excludes energy and food expenses) has remained stubbornly high, the Fed is a lot closer to kicking off a rate-easing cycle than it is to further raising rates. Just as BofA benefited more than its money-center peers when interest rates were climbing, it'll probably be adversely impacted more than other major banks when interest rates begin declining.
Locking in some gains, especially with Bank of America valued at 25% above its book value, might be a smart move with an easing cycle expected to begin in mere months.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
