It was 1965 when Warren Buffett became the CEO of the Berkshire Hathaway (BRK.A -2.20%) (BRK.B -2.03%) investment company. He and his team now oversee a $290 billion portfolio of publicly traded stocks in addition to several private, wholly-owned businesses. Berkshire also has a record $325 billion in cash, which can be put to work whenever new opportunities arise.
Had you invested $1,000 in the S&P 500 (^GSPC -1.54%) index in 1965, it would be worth around $342,906 today. However, had you invested $1,000 in Berkshire stock at the very same time, it would be worth an eye-popping $42.5 million.
That incredible outperformance is the reason Wall Street closely watches Buffett's every move. According to Berkshire's 13-F filings, he went on a big selling spree during 2024. However, the conglomerate's most recent financial report (for the third quarter, ended Sept. 30) revealed something even more surprising.
For the first time in six years, Buffett decided not to buy his favorite stock. I think there's a clear reason why.
Image source: The Motley Fool.
The stock market is expensive relative to its history
The S&P 500 delivered a return of 25% in 2024 (including dividends), which followed a 26% gain in 2023. The index has only mustered a back-to-back annual gain of 25% or more on one other occasion in its history dating back to 1957 -- that was during the dot-com internet bubble, in 1997 and 1998.
After a barnstorming two-year run, the S&P is now quite expensive. It trades at a price-to-earnings (P/E) ratio of 24.8, which is a 37% premium to its long-term average of 18.1.
Valuation isn't a good timing tool, because the stock market can remain expensive for years. However, Buffett makes decisions which he feels will benefit Berkshire's shareholders, so valuation might explain some of his drastic moves in 2024.
Buffett recently trimmed a number of stocks Berkshire's portfolio
Apple stock is Berkshire's largest holding. The position was worth over $170 billion at the start of 2024, representing about half of the conglomerate's entire portfolio value. However, Buffett and his team slashed Berkshire's Apple holding by more than half through the first nine months of 2024, so it now represents around 24.5% of its portfolio.
Apple is the largest stock in the S&P, and it's even more expensive than the index. Its P/E ratio soared to a multiyear high during 2024, and even after a recent dip, it's still 38.9 which is substantially higher than its 10-year average of 22.5:
AAPL PE Ratio data by YCharts
Berkshire spent around $38 billion acquiring Apple shares between 2016 and 2023, so it was sitting on a substantial profit. Valuation is probably a key reason Buffett decided to cash in some of those gains.
But Apple wasn't the only stock Berkshire trimmed through the first three quarters of 2024. It reduced its positions in Bank of America, Chevron, and T-Mobile, to name just a few.
Plus, Berkshire completely exited its positions in Snowflake, Hp Inc, Floor & Decor Holdings, and Paramount Global.
As I touched on earlier, Berkshire is now sitting on a record $325 billion in cash, which is a clear sign Buffett might be feeling cautious about the market. It's possible he's waiting for a correction to scoop up a bargain or two using that gigantic pile of dry powder.
Buffett shunned his favorite stock in the third quarter
When I make reference to Buffett's favorite stock, I'm talking about none other than Berkshire Hathaway itself. Buffett has authorized the repurchase of $77.8 billion worth of Berkshire stock since 2018, which is more than twice the amount the conglomerate invested in Apple.
Stock buybacks are an effective way to return money to shareholders. When Berkshire repurchases its own stock on the open market, it reduces the number of shares in circulation, which organically increases the price-per-share by a proportionate amount.
Dating back to 2018, Berkshire consistently repurchased its own shares in each and every quarter -- until the third quarter of 2024, when it repurchased none at all:
BRK.A Stock Buybacks (Quarterly) data by YCharts
It's possible Berkshire's valuation climbed too high for Buffett's liking. Last year, its price-to-sales (P/S) ratio jumped to 2.5, which was a 26% premium to its 10-year average of 1.98. Buffett wants to buy back stock at the cheapest possible price, because it means he can take more shares out of circulation per dollar spent, which translates into better value for shareholders.
BRK.A PS Ratio data by YCharts
This probably isn't the end of Berkshire's buyback program. The conglomerate can repurchase stock at management's discretion as long as its cash, equivalents, and holdings in U.S. Treasury securities remain above $30 billion. Remember, that figure is currently a whopping $325 billion.
Berkshire will report its financial results for the final quarter of 2024 sometime in February. Since its P/S ratio has declined to 2.1, we'll see if Buffett decided to authorize more buybacks.
Nevertheless, the fact Berkshire sold piles of stock, preserved cash, and shunned buybacks towards the end of 2024 probably isn't a great sign for the broader market. The S&P 500 is already down 4% over the past month, so it's possible a correction is on the horizon.
That doesn't mean investors should rush to sell stocks -- instead, they should mentally prepare for a potential downturn and stand ready to buy the dip. If history is any guide, that's almost certainly what Buffett will be doing.
