Wednesday, February 16, 2011

Is the Oracle of Omaha Turning Cautious on Stocks?

Yesterday's Investment News carried an article discussing recent stock activity in the Berkshire Hathaway portfolio.

Usually it is unwise to make too much of reported changes in Berkshire's equity holdings for at least a couple of reasons.

One, some of Berkshire's other subsidiaries have equity positions that are not directly managed by Warren Buffett.

And, two, Buffett may be planning another major acquisition which would require cash.

Still, I think that his most recent changes were so significant that they warrant a mention.

First, he has thrown in the towel on his BankAmerica holding, which was a losing trade (even the Great One makes mistakes!):

Warren Buffett's Berkshire Hathaway Inc. sold its stake in Bank of America Corp., ending an investment that spanned three and a half years in which the lender's stock lost more than two-thirds of its value.

But note that he remains the largest shareholder in Wells Fargo, so its not that he dislikes banks - this is clearly a negative vote for Bank America.

But here was the part I found more interesting:

Berkshire also eliminated its stakes in Nike Inc., Comcast Corp., Nalco Holding Co., Fiserv Inc., Lowe's Cos. and Becton, Dickinson & Co. in the fourth quarter. In November, Berkshire disclosed that it had sold holdings of Home Depot Inc., trash hauler Republic Services Inc. and Iron Mountain Inc., a provider of records management. Buffett's U.S. portfolio had 25 stocks and a value of about $52.6 billion at the end of December.

I went back to Value Line and did a little research. As it turns out, 60% of Berkshire's publicly-traded equity holdings are now concentrated in just three stocks: Wells Fargo; American Express; and Coca Cola. I suspect that Buffett views all three of these positions as more-or-less permanent. The other stocks that remain (e.g. Washington Post) are also long-term holdings.

However, here's the more relevant question. Why is raising cash? As of the end of the year, Berkshire already had more than $35 billion on its balance sheet, even after the Burlington Northern purchase for $26 billion last year.

Buffett in the past has talked about how frustrating it is to him to have so much cash, especially with money market rates so low. Moreover, the portfolio of businesses that Berkshire now has are cash machines, so liquidity is not a problem. Some of the stocks he sold pay decent dividends - if he was OK with the stocks, why not just hold on and collect the payouts?

The Investment News piece suggested that he might be simply repositioning the portfolio for a transition to a new manager (Buffett is, after all, 80 years old) but this doesn't ring true to me.

I know I am projecting, but I am guessing that Buffett is just getting a little cautious on stocks in general. Remember that he told everyone to buy stocks in October 2008, and the S&P is up +41% since that time.

It may be that he just feels he will be able to deploy his cash in private equity deals rather than in the public markets, or maybe he thinks he will be able to get a better buying opportunity in the markets down the road.