Holding company Berkshire Hathaway ($BRK.A) ($BRK.B) recently made significant changes to its stock portfolio that’s valued at $310 billion, catching Wall Street’s attention. Notably, Berkshire Hathaway, which is run by famed investor Warren Buffett, has reduced two of its biggest positions, Apple (AAPL) and Bank of America (BAC). These sales have raised eyebrows and prompted discussions about Warren Buffett’s strategy and view of the market. Despite these concerns, I continue to have faith in 94-year-old Buffett’s capital management skills and remain bullish on Berkshire Hathaway’s stock.
Apple: Trimming the Tech Giant
One reason to be bullish on Berkshire Hathaway’s stock is that Warren Buffett remains cautious when it comes to investing, never putting capital at risk. This helps to explain why Berkshire cut its stake in Apple by nearly 50% during Q2 of this year. This marked a significant change for a holding that once represented half of Berkshire’s stock portfolio. Prior to the sale, Berkshire held 789 million shares of Apple. That stake has now been reduced to 400 million shares. This cut dropped Berkshire’s position in Apple from about 5.6% to 2.6%, worth $89.42 billion today.
Apple had long been one of Berkshire’s crown jewels, consistently praised by Buffett for its strong business fundamentals. Still, the stock’s valuation has surged in recent years, with investors increasingly willing to pay a premium for the tech giant. Apple’s forward price-to-earnings (P/E) ratio has been hovering above 30X. Buffett has said that he prefers stocks that trade at 15 times future earnings estimates or lower. The hefty premium for APPL stock was likely a factor in Buffett’s decision to lock in some profits.
Despite this notable cut, Buffett’s confidence in Apple’s future remains high, given that it remains Berkshire’s largest equity holding. However, the recent sales have pushed Berkshire’s cash and equivalents to $277 billion, a record for the company. With interest rates at their highest level in more than 20 years and the stock market near all-time highs, stockpiling cash and generating high yields on it seems like a prudent strategy. And Buffett is notoriously risk averse.
Bank of America: Adjusting for Economic Uncertainty
Sales of Bank of America stock also don’t worry me or diminish my positive view of Berkshire Hathaway’s stock. Buffett has been trimming Berkshire’s stake in Bank of America in recent months. Since late July, Berkshire has reduced its stake from about 12.5% to just over 11%. The most recent batch of sales occurred in September when Berkshire sold 18.7 million shares during nine consecutive trading sessions, bringing its total holdings down to 858 million shares worth $33.12 billion. Buffet has been offloading BAC stock ever since it hit a two-year high this July.
Speculation has run rampant concerning the Bank of America stock sales. My theory is that, with the Federal Reserve likely to cut interest rates in coming months, banks, which depend heavily on net interest margins, may see their profits pressured. Lower rates would narrow the spread between what banks earn on loans and what they pay on deposits, squeezing earnings. By trimming its exposure to Bank of America now, Berkshire appears to be trying to get ahead of these potential issues.
Despite the sales, it’s important to remember that Berkshire Hathaway remains the largest shareholder of Bank of America. This suggests that, while Buffett is shortening his position, he still sees long-term value in the bank. Also, if Berkshire’s stake falls below 10%, it would remove the need for Buffett to report every sale he makes of the stock. Buffett may continue to reduce his position in Bank of America, but it doesn’t mean he has turned bearish on the stock or the lender’s prospects.
Is Berkshire Stock a Buy or Sell?
Wall Street’s view on Berkshire Hathaway’s more affordable Class B stock remains bullish. There’s currently a Moderate Buy consensus rating on the stock based on one Buy and two Hold recommendations assigned in the past three months. At $477.00, the average Berkshire stock price target implies 6.26% upside potential.
If you’re wondering which analyst to follow concerning Berkshire stock, the most profitable analyst on a one-year timeframe is Brian Meredith from UBS (UBS), with an average return of 13.05% per rating and a 95% success rate.
Read more analyst ratings on BRK.B stock
Conclusion: In Warren Buffett We Trust
Berkshire Hathaway’s recent sales of Apple and Bank of America stocks are no reason for concern. On the contrary, they are yet another example of how Warren Buffett balances taking profits and mitigating risk. By slashing its Apple stake in half, Berkshire locked in profits from a stock that had grown substantially and whose valuation had gotten too high for Buffett’s comfort. The trimming of Bank of America shares reflects a forward-looking strategy and shows that Buffett is likely anticipating profit pressures at banks as interest rates come down.
Berkshire Hathaway continues to hold sizable positions in both Apple and Bank of America, demonstrating continued confidence in each company. As an avid fan of Berkshire Hathaway and believer in Warren Buffett’s capital management skills, I remain bullish on this stock and continue to trust the Oracle of Omaha, who is widely viewed as one of the greatest investors of all time.
