One of the most important days of the fourth quarter has arrived. With the exception of Election Day and Social Security’s annual cost-of-living adjustment (COLA) reveal, no data release is, arguably, more meaningful to investors than quarterly Form 13F filings.
A 13F is a required filing with the Securities and Exchange Commission by institutional investors with at least $100 million in assets under management. It’s due no later than 45 calendar days following the end to a quarter (in this case, Nov. 14). These filings provide a detailed snapshot of which stocks Wall Street’s smartest and most successful money managers purchased and sold in the latest quarter (in this instance, the third quarter).
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Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Though there are a number of billionaire asset managers who have made their mark on Wall Street, none are more revered than Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett. The appropriately named “Oracle of Omaha” has practically doubled up the average annual total return, including dividends, of the benchmark S&P 500(SNPINDEX: ^GSPC) since he became CEO nearly 60 years ago.
There isn’t a 13F investors anticipate more than that of Berkshire Hathaway, which will release its filing after the closing bell today. Although the highlight of Berkshire’s 13F is seeing which stocks Buffett and his top investment advisors, Todd Combs and Ted Weschler, are buying, the bigger story today has to do with the one stock he’s suddenly not purchasing.
In each of the last eight quarters (Oct. 1, 2022 through Sept. 30, 2024), Warren Buffett has sold more in equities than he’s purchased, to the cumulative tune of $166.2 billion. This puts Buffett’s selective buying activity into more of a spotlight than usual.
What’s particularly noteworthy about the Oracle of Omaha’s buying habits is that you won’t see his favorite stock to buy listed in Berkshire’s quarterly 13F. You’ll only find detailed buying activity of this “favorite stock” listed in Berkshire Hathaway’s quarterly operating results, just prior to the executive certifications.
This favorite stock to buy (cue the dramatic music) is none other than shares of his own company.
Warren Buffett hasn’t always been able to repurchase shares of Berkshire Hathaway. Prior to July 2018, shares could only be bought back if Berkshire’s stock traded at or below 120% of book value (no more than a 20% premium to its book value, as of the most recent quarter). Since Berkshire’s stock never fell to or below this threshold, Buffett wasn’t able to put a penny of his company’s cash toward buybacks.
But on July 17, 2018, Berkshire’s board amended the rules governing buybacks to allow Buffett and then-right-hand-man Charlie Munger, who passed away in November 2023, more liberty to repurchase shares of their company. The new rules set no ceiling or end date on buybacks as long as Berkshire Hathaway has at least $30 billion in cumulative cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Buffett views his company’s shares as intrinsically cheap.
For 24 consecutive quarters (a span of six years), Buffett repurchased shares of Berkshire Hathaway, totaling almost $78 billion. But during the September-ended quarter, for the first time since Berkshire’s board amended the rules governing buybacks, the Oracle of Omaha didn’t buy shares of his favorite stock.
This is a far bigger story than the select few stocks Buffett and his team have been buying, and it foreshadows a very real concern for Wall Street.
Image source: Getty Images.
Warren Buffett passing on purchasing shares of Berkshire’s stock when his company’s cash pile is sitting at a record high ($325 billion) signifies that one of Wall Street’s most ardent value investors is struggling to find a good deal. Berkshire’s price-to-book value recently hit levels that haven’t been consistently observed since 2008.
However, the stock market is, collectively, much pricier than Berkshire’s stock.
Most investors rely on the traditional price-to-earnings (P/E) ratio to determine if a stock is relatively cheap or pricey when compared to its peers or the broader market. Although the P/E ratio can work well in some scenarios, it’s not a particularly effective valuation tool for growth stocks, or when shock events occur (such as lockdowns during the early stages of the COVID-19 pandemic).
A considerably more encompassing valuation tool is the S&P 500’s Shiller P/E ratio, which is also commonly referred to as the cyclically adjusted P/E ratio, or CAPE ratio. Whereas the traditional P/E ratio only accounts for trailing 12-month earnings, the Shiller is based on average inflation-adjusted earnings from the prior 10 years. It can smooth out the effect of shock events, which allows for apples-to-apples valuation comparisons.
As of the closing bell on Nov. 11, the S&P 500’s Shiller P/E stood at 38.29, which is more than double its average reading when back-tested to January 1871. More importantly, this is the highest closing value during the current bull market, and the third-highest reading during a continuous bull market in history.
There is a partially logical explanation for the persistently higher Shiller P/E readings over the last 30 years. Extensive periods of low interest rates encouraged borrowing, acquisitions, and innovation by businesses, which in turn led to strong growth rates and a willingness by investors to accept higher valuation premiums. The advent of the internet in the mid-1990s broke down information barriers that had previously existed, which also increased investors’ willingness to take risks.
However, extended valuation premiums have historically been bad news for Wall Street. Including the present, there have only been six instances in 153 years where the S&P 500’s Shiller P/E surpassed 30 during a bull market. Following the previous five occurrences, the S&P 500 and/or other major stock indexes eventually (key word!) declined by 20% to 89% from their peak.
Admittedly, the Shiller P/E doesn’t provide any guidance on when peaks will occur. This is to say that stock valuations can remain extended for weeks, months, or even years, as they did prior to the dot-com bubble. Nevertheless, it’s a telltale sign that’s consistently foreshadowed trouble for Wall Street.
While this may not be the valuation tool Warren Buffett prefers, his actions speak loudly that stocks are pricey and value is difficult to come by. Though this doesn’t alter Buffett’s long-term optimism for the U.S. economy and stock market, it does suggest choppy waters may be imminent.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
