Berkshire Hathaway’s closely watched cash reserves could top $200 billion, exceeding Hungary’s entire annual GDP, following an unusual sell-off in some of his favorite stocks by CEO Warren Buffett.
The Omaha-based conglomerate is expected to announce that its cash reserves have surpassed the previous record of $189 billion, set in the first quarter, when it reports its second-quarter earnings Saturday morning. Berkshire’s results come as Buffett has unloaded winning investments in Apple, Bank of America and others, leading some to believe the Oracle of Omaha is worried about the bull market overheating.
“It looks like he’s trying to de-risk the portfolio a little bit,” said Bill Stone, chief investment officer at Glenview Trust Company and a Berkshire shareholder, earlier this week. “He’s cutting two of the major holdings, and there’s nothing more economically sensitive than the banks. The market seems so confident right now of a soft landing and maybe they’re taking a more contrarian view.”
A series of stock sales
Berkshire has been a net seller of stocks for six consecutive quarters. Notably, Buffett reduced his huge stake in Apple by 13% in the first quarter for tax reasons after reaping huge gains. The selling could have continued into the second quarter, as the iPhone maker’s shares rose 23% during the period.
Meanwhile, in a surprising move, the conglomerate recently began selling shares of Bank of America, its second-largest holding after Apple. Over the past 12 trading sessions, Berkshire has sold $3.8 billion worth of the Charlotte-based bank. The Bank of America sales began in July and will not be reflected in the second-quarter report.
Buffett’s massive hoard of cash has produced impressive returns as Treasury yields have jumped over the past two years, but with interest rates set to fall from multi-year highs, his growing cash reserves could raise questions again. If invested in three-month Treasuries at about 5%, $200 billion in cash would generate about $10 billion a year, or $2.5 billion a quarter, but those returns are set to decline once the Federal Reserve starts lowering interest rates.
“The question is how long can they hold out,” Andrew Kligerman, a Berkshire analyst at TD Cowen, said in an interview, referring to Berkshire’s huge liquidity.
High prices, few purchases
Buffett, who turns 94 later this month, said at Berkshire’s annual meeting in May that he is open to investing more capital, but high prices are making him hesitant.
“I think it’s reasonable to assume that (cash) will probably be around $200 billion at the end of this quarter,” the investing icon said at the time. “We’d love to spend it, but we’re not going to do it unless we think (a company) is doing something that’s very low risk and can make us a lot of money… It’s not like I’m on a hunger strike or anything like that. It’s just… things are not attractive.”
Weakness in non-insurance sectors
Investors will also be watching closely for quarterly results from BNSF Railway and Berkshire Hathaway Energy, utilities businesses that have shown signs of weakness recently. BNSF is grappling with pay increases and revenue declines, while BHE is under pressure to be held accountable for wildfire damage.
“The non-insurance side will weigh on results, whether it’s slow rail volumes coupled with higher labor costs, or utilities, which could have a good quarter, but no one will be thrilled about it given the liability exposure,” said TD Cowen’s Kligerman, who recently initiated research coverage of Berkshire with a hold rating.
In contrast, Berkshire’s insurance business performed well, with insurance underwriting profits increasing 185% year-over-year in the first quarter.
Berkshire’s shares have rallied more than 21% this year, outpacing the S&P 500’s 14% return through Thursday. The conglomerate’s market capitalization has risen to $956 billion, close to joining the small number of U.S. stocks valued at $1 trillion or more.
