Among Wall Street’s billionaire investors, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett is, arguably, in a class of his own. In a world where investors are using advanced charting software and artificial intelligence (AI) in an effort to gain a competitive edge, Buffett and his team have relied on old-school fundamental metrics and detective work to locate amazing businesses.
Since taking the reins as CEO in 1965, the aptly dubbed “Oracle of Omaha” has overseen a nearly 5,200,000% cumulative return for Berkshire’s Class A shareholders (BRK.A). It’s no surprise why professional and everyday investors often wait on pins and needles for details of which stocks Buffett and his team have been buying and selling.
Although Berkshire Hathaway’s Form 13F — the document that tells investors what Wall Street’s top money managers bought and sold in the most recent quarter — is due out in a little over a week, investors don’t always have to wait a full three months for clues as to what Buffett and his team have been up to. For instance, when Berkshire holds a 10% or greater stake in a public company, it’s required to file Form 4 with the Securities and Exchange Commission (SEC) every time shares are purchased or sold.
Recent Form 4 filings from Berkshire point to an ominous and unmistakable warning to Wall Street from the Oracle of Omaha and his trusty investment aides, Todd Combs and Ted Weschler.
Warren Buffett has sold shares of Bank of America stock for 12 consecutive trading sessions
For years, banking giant Bank of America (NYSE: BAC) has maintained its standing as the second-largest holding in Berkshire’s 44-stock, $395 billion investment portfolio, behind only tech stock Apple (NASDAQ: AAPL).
The cyclical nature of financial stocks — i.e., the fact that they can take advantage of economic expansions lasting substantially longer than recessions — coupled with their robust capital-return programs, makes them attractive to the Oracle of Omaha. Bank of America, in particular, is the most interest-sensitive among America’s largest money-center banks. It’s enjoyed an outsized benefit to its net-interest income following the Federal Reserve’s most aggressive rate-hiking cycle in four decades.
However, Buffett’s love affair with Bank of America appears to be in question. Four recently filed Form 4s with the SEC show that Berkshire Hathaway’s brightest investment minds have sold shares of BofA stock for 12 consecutive trading sessions (July 17-Aug. 1). Altogether, 90,422,124 shares of Bank of America stock were sold, totaling proceeds of roughly $3.82 billion.
There are a number of legitimate reasons for Buffett and his investment crew to have reduced Berkshire’s stake in Bank of America by about 9% in two weeks.
Profit-taking is one possible answer. During Berkshire’s most recent annual shareholder meeting, Buffett opined that corporate tax rates were liable to climb in the future. The prospect of higher corporate tax rates coerced the sale of more than 116 million shares of Apple during the first quarter, along with a nearly 50% reduction in the tech goliath in second quarter, and may be encouraging a reduction in BofA during the third quarter.
Bank of America’s interest sensitivity might also explain 12 consecutive business days of selling activity. Just as BofA enjoyed an outsized benefit from rising interest rates, the expectation of a rate-easing cycle kicking off in September could lead to its net-interest income shrinking faster than its peers.
But more than anything, 12 straight days of selling Bank of America stock appears to signal that value is getting tougher to come by on Wall Street. With BofA now trading above its book value, which is something of a rarity over the last 15 years, it may simply not be as attractive to the Oracle of Omaha and/or his team.
Warren Buffett wants no part of the Wall Street “casino”
Believe it or not, Buffett’s mammoth sales in both Apple and Bank of America were somewhat telegraphed earlier this year when the Oracle or Omaha published his annual letter to shareholders. While this letter is often used to promote a long-term ethos and praise Berkshire’s “forever” holdings, it also served as a cautionary tale for the investing community.
In his 2023 letter to shareholders, Buffett spoke of casino-like behavior that he wants no part of. Said Berkshire’s chief:
Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than I was in school. 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.
While I can’t read minds, this sounds like a roundabout admission that stocks are pricey. In his nearly six decades as CEO, Buffett has emphasized patience in waiting for amazing businesses to fall to attractive price points. The $277 billion (and growing) in collective cash, cash equivalents, and U.S. Treasuries on Berkshire’s balance sheet (as of June 30) points to the lack of value the Oracle of Omaha and his crew are seeing.
To add to this point, Warren Buffett has been a net-seller of equities for seven consecutive quarters, as of June 30, 2024 (dollar figure represents net-selling activity for a listed quarter):
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Q4 2022: $14.64 billion
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Q1 2023: $10.41 billion
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Q2 2023: $7.981 billion
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Q3 2023: $5.253 billion
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Q4 2023: $0.525 billion
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Q1 2024: $17.281 billion
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Q2 2024: $75.536 billion
For those of you without calculators handy, this equates to $131.6 billion in cumulative net-selling activity since Oct. 1, 2022.
The reality for Buffett, along with investors as a whole, is that the stock market is historically pricey.
The S&P 500‘s Shiller price-to-earnings (P/E) ratio, which is also commonly known as the cyclically adjusted price-to-earnings ratio (Cape ratio), recently hit a level that’s been observed only a handful of times over the last 153 years.
Whereas most investors are probably familiar with the traditional P/E ratio, which divides a company’s share price into its trailing-12-month earnings per share, the Shiller P/E is based on average inflation-adjusted earnings from the prior 10 years. Using 10 years of earnings history smooths out the effect of one-off events that could otherwise adversely affect valuation models.
On Aug. 1, 2024, the Shiller P/E ended at 35.13. There have only been six occasions since the beginning of 1871 where the S&P 500’s Shiller P/E surpassed 30 during a bull market rally. Following the five prior incidences, the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite all plunged by 20% to 89%. Although the Shiller P/E ratio offers no assistance forecasting when big declines will occur on Wall Street, this valuation metric has a flawless track record of portending trouble for Wall Street.
Warren Buffett’s willingness to back away from the proverbial casino and meaningfully pare down his company’s leading stakes in Apple and now Bank of America strongly suggests he’s struggling to find value. This is a concern investors would be wise not to ignore.
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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.
Warren Buffett’s Selling Over $3.8 Billion Worth of Bank of America Stock in 2 Weeks Is an Ominous and Unmistakable Warning for Wall Street was originally published by The Motley Fool
