Warren Buffett’s investment company Berkshire Hathaway has been very active in the stock market lately.
Warren Buffett has been CEO of Berkshire Hathaway (BRK.A 0.12%) (BRK.B -0.23%) since 1965. He and his team manage a $318 billion portfolio of publicly traded stocks and securities, in addition to $277 billion in cash and numerous private subsidiaries.
Berkshire shares have delivered a compound annual return of 19.8% under Buffett’s leadership, which could have turned a $1,000 investment into more than $42 million during his 59-year tenure. That’s why Wall Street is keeping a close eye on his every move.
During the second quarter of 2024, Berkshire went on a selloff and cut its $160 billion stake in Apple in half and trimming a number of other positions including Chevron, T-MobileAnd Capital one financialjust to name a few.
Berkshire also sold its entire $800 million position in data specialists Snowflake (SNOW 0.43%)that it had owned since 2020. But there’s one stock that Buffett clearly still loves.
Image source: The Motley Fool.
Snowflake was not a good fit for Berkshire’s portfolio
Berkshire’s sales of Apple, Chevron and T-Mobile could reflect Buffett’s cautious view of the broader stock market in general. The S&P500 The index currently trades at a price-to-earnings (P/E) ratio of 27.8, which is a 53% premium to the long-term average P/E of 18.1 from the 1950s. Prudent portfolio management can mean taking money off the table when the market looks expensive.
However, I think Berkshire may have sold Snowflake’s stock for another reason. Despite its growing portfolio of AI products and services, the cloud computing company is experiencing a slowdown in revenue growth and huge losses on the bottom line. Buffett often invests in companies for their robust profitability, as it allows them to maintain shareholder-friendly programs such as share buybacks and dividend plans for the long term, which helps grow his profits. Snowflake just doesn’t fit into the picture.
Berkshire bought Snowflake shares before its 2020 IPO, so we don’t know exactly what price it paid. However, it was floating at $120 per share, which is about the level it’s trading at today. So Snowflake has essentially not posted any profits in its four-year period as a publicly traded company, despite the S&P 500 setting multiple all-time highs during that period.
Snowflake’s Data Cloud helps large organizations aggregate their valuable information in one place so they can analyze it to gain valuable insights. The company could do well in the AI race because the new Cortex platform allows companies to combine their data with off-the-shelf large language models (LLMs) to build powerful AI software.
Cortex also comes with several pre-built AI tools to further enhance the Data Cloud. For example, Document AI allows companies to extract information from unstructured sources such as contracts and invoices. In the past, human workers had to read through those documents and manually convert the data into a usable format, so Document AI could save the user an incredible amount of time.
I don’t think Snowflake stock is destined for upside in the near term (and apparently neither does Buffett), but it’s a stock to watch as the AI industry expands.
Buffett continues to pour money into his favorite stocks
You won’t find Buffett’s favorite stocks in Berkshire’s quarterly 13F filings, because that stock is… Berkshire Hathaway! Despite his cautious approach to the broader market, Buffett continued to approve stock buybacks in the second quarter of 2024, investing $345 million in Berkshire stock.
Why do I call it his favorite stock? In addition to being at the helm of Berkshire Hathaway for 59 years, Buffett has authorized $77.8 billion in stock buybacks since 2018. twice the amount he spent buying Apple! In other words, you could say that he often sees more value in his own company than any other company in the entire market.
Buybacks are Buffett’s preferred way to return money to shareholders. Berkshire can continue repurchasing shares at management’s discretion, as long as its cash, equivalents and holdings in U.S. Treasury securities remain above $30 billion. Considering the conglomerate currently has a whopping $277 billion in liquidity, the buybacks aren’t likely to stop anytime soon.
There is one caveat. Berkshire stock currently trades at a price-to-sales ratio of 2.5, which is 26% higher than its 10-year average of 1.98. That means it’s not cheap, which likely explains why Buffett only authorized $345 million in buybacks in the second quarter — the smallest amount Berkshire has spent on stock acquisitions in any quarter since it resumed buybacks in 2018 .
BRK.A PS Ratio data according to YCharts
What should investors do from here?
Snowflake is one of many AI stocks, and its problems aren’t necessarily typical of the others. Nvidiafor example, is experiencing triple-digit growth in its sales and profits, and its shares are trading at near record highs. Simply put, Berkshire’s sale of Snowflake isn’t a sign that investors should avoid the rest of the sector.
But the S&P 500 is undeniably expensive right now. That doesn’t mean the price has to fall; Buffett himself will tell you that he has no idea what the market will do tomorrow, or even a year from now. He is a long-term investor who buys quality companies and lets time do the hard work.
However, he does have a duty to Berkshire shareholders, which means he is obligated to make decisions that he believes will deliver the most value. That occasionally means selling large amounts of stock, as Berkshire has done this year.
Buffett often recommends that regular investors buy exchange-traded funds (ETFs), which directly track the performance of indexes like the S&P 500. Even though the market looks expensive today, the current price will probably look cheap when we think about this moment ten years from now. from now on. That’s why consistently adding to an ETF every month can yield powerful results over time.
Berkshire holds positions in the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trustboth are great options for investors.
