The long bull market has continued to chug along, even as escalating trade war tensions and choppy economic data have thrown the sustainability of the current economic expansion into increasing doubt. For the past several years, even Warren Buffett (Trades, Portfolio), the undisputed doyen of value investing, has proven to be a persistent bull on the stock market.
According to Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) latest earnings report, however, Buffett may at last be losing his enthusiasm for stocks. With the market still teasing all-time highs, cash appears to once again be king in the eyes of the Oracle of Omaha.
Cash piling up
Berkshire has always enjoyed a healthy cash pile, but its bank balance hit a new record after the second quarter. The sprawling conglomerate now boasts an eye-watering $122 billion.
Buffett’s sudden preference for cash comes after a long run of highly positive and bullish commentary. Buffett declared that stocks were still “on the cheap side” in 2017, even after the Trump administration added significant fuel to an already white-hot market. A year later, he was still buying stocks. And he was still buying this time last year. Indeed, Berkshire has been buying stock, as well as buying back its own shares, at a healthy clip for the past year.
So, then, why the second-quarter pile-up? Well, there appears to be two chief causes for the record-breaking cash balance, as Bloomberg reported earlier this month:
“Berkshire sold $1 billion more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017. Buffett was an active buyer of equities every quarter last year, including almost $13 billion in the third quarter alone. Buffett hasn’t had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire’s own stock in the second quarter.”
A change of tune
Buffett has had no qualms about buying back Berkshire shares in the past year, even when the stock was trading higher. Indeed, the stock is down a little over 2% year to date. So if Berkshire was a bargain before, it is hard to conclude Buffett does not believe that to be the case any longer.
Given that stocks are trading near all-time highs, however, it is unsurprising that Buffett would be less enthused about the prospect of buying new equities. He may have been willing to ignore signs of an overheating market while the economic trajectory seemed solid, but the recent heating up of the trade war and cooling down in the global economy could be cause for anyone to rethink the wisdom of buying stocks.
More surprising is the slowdown in share repurchases of Berkshire’s own shares. According to Bloomberg, the sharp slowdown in buybacks is indicative of Buffett’s belief the company's shares are not a bargain. That conclusion misses a bigger story that appears to be in the works. When market corrections occur, investors frequently pile into safer assets. That flight to safety could end up acting as a tailwind for Berkshire stock, even in a harsh correction. That would seem to be a reason for Buffett to buy back more Berkshire shares, yet he has done the opposite.
Getting the dry powder ready
Given the inexorable pace of the post-Great Recession bull market, one might forgive investors for forgetting what a real value opportunity looks like. When the conglomerate made its highly publicized bet on Amazon.com Inc. (AMZN, Financial) earlier this year, some value fundamentalists leveled that very accusation at Buffett.
However, Berkshire’s mounting cash pile seems to be clear proof that Buffett has not forgotten how to position himself to seize opportunities. The global economy is on shaky ground, and there are mounting signs that a recession might begin within the next year. With loads of cash on hand, Buffett has positioned Berkshire perfectly to make deals and buy up bargains in the face of general market turmoil.
Josh Wolfe, a renowned venture capitalist and market commentator, has observed that Berkshire’s $122 billion in cash gives it a “large call option” on a number of opportunities. Most especially, it provides dry powder to make bolt-on acquisitions of publicly traded companies, particularly “strong moat industrial companies” that are currently expensive, but will look a lot cheaper after taking a bear market beating.
Moreover, the hefty cash pile puts Berkshire in the position to be a “lender of last resort” to overstretched companies. Berkshire made out like a bandit from the Great Recession from filling this very role for Goldman Sachs (GS) and other financial institutions facing severe liquidity pressure.
Verdict
Investors should pay close attention to Berkshire’s cash balance in the months ahead.
A storm appears to be brewing for the global economy. Buffett is positioning Berkshire to prosper when the downpour begins.
Prudent investors would be wise to emulate Buffett's preparatory measures.
Disclosure: No positions.
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