Why Warren Buffett just sold $10.5 billion worth of stock, one of Berkshire Hathaway’s biggest holdings

Few investor moves and comments attract as much attention as Warren Buffett. There is a good reason for this. He has a nearly 70-year track record of delivering incredible market returns to shareholders. Additionally, he manages over $600 billion in investable assets. Berkshire Hathaway (BRK.A 0.84%) (BRK.B 0.65%)That’s a lot of weight to throw.

So whenever Buffett’s regulatory filings reveal that he has sold one of his holdings, investors’ opinions on that stock are likely to be swayed.

In fact, Buffett has significantly reduced the size of his stock portfolio over the past few quarters. Berkshire’s equity positions totaled $348 billion as of the end of the second quarter of 2023. That total fell to $280 billion at the end of June this year. S&P 500 (^GSPC 0.47%) It rose 22.7% during that period. In fact, Buffett has sold more stocks than he has bought over the past seven quarters.

Berkshire is expected to record its eighth consecutive quarter of net sales when it reports quarterly results next month. That’s because the Oracle of Omaha sold $10.5 billion worth of stock, one of his top holdings. bank of america (BAC 1.57%) For the past 3 months. — And $9.6 billion of that revenue came in the third quarter.

There may be two reasons why Buffett decided to sell his Bank of America stock.

Image source: The Motley Fool.

Does Buffett like banks anymore?

Buffett was once a bigger investor in bank stocks. Considering Berkshire Hathaway has an insurance business at its core, the banking and finance industry appears to be in his wheelhouse.

In 2020, Berkshire Hathaway held the stake. usa bancorp, wells fargoand JP Morgan Chase. He closed his JP Morgan position that year, closed his Wells Fargo stake in 2022, and sold his last stake in U.S. Bank in early 2023. There are still a lot of bank stocks in Buffett’s portfolio, but Bank of America remains. , which has by far the largest position in the segment.

Buffett explained his changed attitude toward the banking industry at a shareholders’ meeting held last year immediately after Silicon Valley Bank’s bankruptcy. He pointed out that the environment in which banks operate has become much more vulnerable because it is now easy to move funds from one institution to another.

Buffett’s comments suggest that smaller banks may be a much riskier investment today than they were in the past. But Bank of America is the second-largest conglomerate in the U.S. by assets and market capitalization and has a large retail presence, so investors shouldn’t fear depositors withdrawing their funds en masse.

It’s very solid, and management has done a great job of turning it around since Buffett first invested $5 billion in 2011.

So Buffett’s recent sales can best be explained by two factors.

First, Buffett said his overall recent sell-off was driven in part by expectations that corporate tax rates will rise in the near future. The corporate tax cuts signed by President Trump in 2017 are scheduled to expire at the end of 2025. At that point, the corporate tax rate on capital gains will be reset from 21% to 35% unless Congress passes a new cut for corporations. . All else being equal, Buffett would be better off letting Berkshire Hathaway pay taxes at a lower rate on the significant profits it makes from Bank of America (and some of its other holdings).

Second, Buffett seems to believe that Bank of America has been trading near its intrinsic value lately. If Buffett didn’t think the stock was trading within 14% of its intrinsic value, selling the stock to save on taxes wouldn’t make sense. Buffett probably doesn’t think the stock is worth more than that, since most sales have occurred at stock prices between $39 and $41.

Buffett’s recent sale on October 10 brought Berkshire’s stake in Bank of America below 10%. That’s below the threshold that requires large corporations to report within three days every time they buy or sell Bank of America stock. Therefore, it is unknown whether Buffett continued to sell Bank of America after that until February.

Should you buy what Buffett is selling?

While it may make sense for Buffett to reduce his stake in Bank of America, it could also be an opportunity for investors interested in the banking industry.

Bank of America was hit hard by the Federal Reserve’s decision to quickly raise interest rates to control inflation. Banks hold large quantities of bonds with longer-than-average maturities on their balance sheets. So while competitors were buying bonds at higher interest rates, Bank of America had trouble getting lower interest rates on older bonds that it had to hold until maturity. At the same time, higher interest rates had to be paid to depositors to prevent them from moving their money elsewhere. As a result, Bank of America’s net interest income declined.

However, management said net interest income hit a low in the second quarter and investors should expect that figure to increase in 2025. Bank of America will be in some shape as the Federal Reserve continues the rate-cutting campaign it began last month. Nice improvement. The stock price has risen to about $42 per share, at which point investors are hoping Buffett’s selling will end. While the current price is higher than the average price Berkshire sold its shares for, it only reflects a small premium to the bank’s average tangible book-to-value multiple over the past five years. So the stock appears to be quite expensive. In that respect, it may make sense for Buffett to sell some stocks for tax reasons, but it may also make sense for individual investors interested in adding solid bank stocks to their portfolios to buy them.