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It's been an eventful week for Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett. On Saturday, May 3, the company held its annual shareholder meeting in Omaha, NE, which typically draws in the neighborhood of 40,000 attendees. It's quite the leap from Berkshire's early days, where its annual meeting was held in the employee cafeteria of subsidiary National Indemnity, and roughly two dozen shareholders would attend.
While the headline of Berkshire's annual meeting was the announcement that the Oracle of Omaha plans to step down as CEO by the end of the year, it wasn't the only eyebrow-raising moment.
May 3 also marked the release of Berkshire Hathaway first-quarter operating results. Though it was, more or less, business as usual for the company's more than five-dozen owned subsidiaries (aside from higher insurance payouts), it's Berkshire's cash flow statement that was of particular interest.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Over six decades, Buffett has made a name of himself by putting his company's capital to work and making sound investment decisions. But based on Berkshire Hathaway's latest cash flow statement, Buffett and his team of top investment advisors, Todd Combs and Ted Weschler, were net sellers of stocks for a 10th consecutive quarter.
A week from today, on May 14, Berkshire Hathaway will file Form 13F with the Securities and Exchange Commission following the closing bell. This filing provides investors with a concise snapshot of Berkshire's trading activity during the March-ended quarter.
But Berkshire's investors don't have to wait for a 13F filing to get a broad-stroke idea of what the Oracle of Omaha has been up to. During the March-ended quarter, Berkshire's cash flow statement listed $3.183 billion in "purchases of equity securities," as well as $4.677 billion in "sales of equity securities." In other words, Buffett and his crew sold $1.494 billion more in equity securities than they purchased.
This has been a common theme over the last 30 months:
Collectively, Warren Buffett has sold $174.425 billion more in stocks than he's purchased over this 10-quarter period -- and it's an undeniable warning to Wall Street that's grown louder over time.
Though some investors might take solace in the recently completed quarter representing the lowest net-selling activity since the fourth quarter of 2023, Berkshire's cash flow statements unequivocally point to Buffett's displeasure with stock valuations.
When looking at things with a very wide lens, you'd struggle to find an investor who's more optimistic about the U.S. economy or stock market than Warren Buffett. He's frequently cautioned investors not to bet against America and has encouraged buying a stake in an S&P 500 (SNPINDEX: ^GSPC) index fund to gain exposure to U.S. businesses.
But over shorter timelines, Buffett's long-term ethos doesn't always align with his value-first mentality.
In mid-February, when the S&P 500 hit its all-time closing high, the "Buffett Indicator," which is a measure of the total market cap of U.S. public companies divided into U.S. gross domestic product, hit almost 206%. This is well above the average market-cap-to-GDP ratio of 85% for this valuation tool (since 1970), which Buffett referred to as "probably the best single measure of where valuations stand at any given moment" in a Fortune magazine interview in 2001.
S&P 500 Shiller CAPE Ratio data by YCharts.
Perhaps even more damning is the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio).
When back-tested to January 1871, the Shiller P/E, which is based on average inflation-adjusted earnings over the previous 10 years, has averaged a multiple of 17.23. In December, the Shiller P/E Ratio almost hit 39, which represents its third-highest reading in a continuous bull market spanning 154 years.
Although the S&P 500 endured historic bouts of volatility in April -- including its fifth-largest two-day decline (-10.5%) over the last 75 years -- which pushed it into correction territory, the Shiller P/E never dipped meaningfully below 32. In fact, the S&P 500's rebound over the prior two weeks lifted the Shiller P/E back to 35.26, as of May 2.
There have only been six instances, including the present, where the Shiller P/E has surpassed 30 for at least two months since January 1871. Following all five prior occurrences, the benchmark S&P 500 lost 20% or more of its value.
Buffett's persistent selling is a clear warning that extended valuations aren't sustainable -- and the latest correction hardly put a dent in what's still a very expensive stock market.
Image source: Getty Images.
Considering the Oracle of Omaha has delivered outsized returns by making smart investments for six decades, some of Berkshire's investors are probably none too happy to see their CEO selling more stock than he's purchasing for 10 straight quarters. But rest assured, there's a silver lining.
Due to this net-selling activity, as well as the ongoing ability of Berkshire Hathaway's subsidiaries to generate positive cash flow from operations, the company's cash pile swelled to $347.7 billion at the end of March. Keep in mind that "cash" encompasses cash, cash equivalents, and U.S. Treasuries.
Buffett and his team of investment advisors have navigated their way through periods of equity overvaluation and panic-driven downturns in stocks many times before. Buffett has a rich and lengthy track record of using patience as a tool to pounce on price dislocations.
As a perfect example, the Oracle of Omaha worked out a deal to infuse $5 billion into Bank of America (NYSE: BAC) in August 2011, shortly after the trough of the financial crisis. Even though BofA didn't request capital from Buffett, the latter saw it as an opportunity to invest in a time-tested brand that needed a little extra financial cushion at the time.
This deal provided Berkshire with BofA preferred stock that yielded 6% annually. More importantly, it came with warrants to purchase up to 700 million shares of Bank of America common stock at a strike price of $7.14, which was notably higher than where shares were trading at the time of Buffett's initial investment. When Berkshire exercised these warrants in the summer of 2017, Buffett's company recognized an immediate $12 billion windfall.
Buffett and his team are more than happy to sit on their proverbial hands until stock-specific valuations become attractive, once again. History shows this strategy works well for Berkshire Hathaway, and the company has nearly $348 billion at its disposal when price dislocations manifest in the future.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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