Warren Buffett recently avoided his favorite stocks for the first time since 2018 and it could mean bad news for Wall Street

If you had invested $1,000 in the S&P 500 in 1965, it would be worth about $325,053 today. However, if you had invested $1,000 in shares of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) at the same time, it would now be worth a whopping $42.5 million.

It was 1965 when Warren Buffett became the CEO of Berkshire. Now, he oversees a $291 billion portfolio of publicly traded stocks and securities, as well as several wholly owned private companies. Berkshire also has $325 billion in cash, which Buffett and his team can put to work when they spot new opportunities.

Given Berkshire’s incredible performance relative to the S&P 500, it’s no surprise that Wall Street is watching Buffett’s every move. According to the filings of the 13-F conglomerate, 2024 is in a wide range.

However, Berkshire’s financial data for the third quarter revealed something even more surprising. For the first time in six years, Buffett he didn’t buy your favorite stocks. Here’s why it should set off alarm bells on Wall Street.

Warren Buffett smiling, surrounded by cameras. — Image source: The Motley Fool.

Berkshire spent about $38 billion buying shares of Apple (NASDAQ: AAPL) between 2016 and 2023, which is the most money he has ever invested in a single company. That position was worth more than $170 billion at the start of 2024, so Berkshire had a very nice gain.

At the time, Apple represented half the value of Berkshire’s entire portfolio of stocks and publicly traded securities. The conglomerate sold small amounts of Apple stock over the years to get some of its gains, but it significantly increased the sale in 2024.

Berkshire unloaded 13% of its Apple position in the first quarter, which Buffett said was for tax reasons. But the conglomerate sold 49% of its remaining Apple shares in the second quarter, followed by 25% of what was left in the third quarter. No real reasons were given.

Apple remains Berkshire’s largest position with a 25.7% weighting in his portfolio, so Buffett probably hasn’t taken a very negative view of the company. And it wasn’t the only stock Berkshire has cut this year.

In 2024 to date, Berkshire reduced its stake Chevron, T-Mobile, Capital One Financiali Bank of America. He also sold all his positions in Paramount Global, HP, Floor & Decor Holdingsand artificial intelligence company Snowflake.

As I mentioned earlier, Berkshire now has $325 billion in cash. It’s the largest pile of dry dust the conglomerate has ever had.

The S&P 500 is up nearly 25% this year, which is on track for a solid 26% gain in 2023. Given that it has averaged a 10.5% annual return since its inception in 1957, a biannual storm of the year. However, it is now undeniably expensive. The index trades at a price-to-earnings (P/E) ratio of 25.7 at the time of writing, which is a 42% premium to its long-term average of 18.1.

Apple is the largest company in the S&P 500 and it looks the same more more expensive than the index. It currently trades at a P/E ratio of 41.1, which is approaching double its 10-year average of 22.4.

AAPL PE Ratio Chart — AAPL PE ratio data for YCharts.

Valuation is not a good timing tool because markets can remain expensive for years, so this is not a signal for investors to sell all their stocks. However, Buffett has an obligation to make decisions that he believes will benefit Berkshire shareholders, so cashing in on some of the conglomerate’s incredible gains in recent years is simply good portfolio management at these extreme valuations.

There’s one stock that Buffett has bought every quarter since 2018, regardless of what the broader market was doing. You won’t find it in the conglomerate’s 13-F filings, because the stock is… Berkshire Hathaway!

Buffett authorized the repurchase of $77.8 billion in Berkshire stock over the past six years, which is more than double the amount he invested in Apple. When Berkshire buys its own stock on the open market, it reduces the number of shares outstanding, which organically increases the price per share by a proportional amount. Buybacks are Buffett’s preferred way to return money to shareholders (instead of paying a dividend).

But in the third quarter of 2024, Buffett did not authorize it anyone repurchase at all. According to the chart below, it was the first time he avoided his favorite stocks since the buyback program began in 2018.

BRK.A share buyback chart (quarterly). — BRK.A share buyback (quarterly) data for YCharts.

Two things may be at play. First, given the valuations of the rest of the market, Buffett might think that Berkshire’s stock is also overpriced (it trades at a slight premium to its 10-year average price-to-sales ratio). Second, perhaps Buffett wants to hold on to cash in case there’s a sharp correction in the S&P 500, so he can use it to get some deals.

So this is probably just a temporary pause in Berkshire’s buyback program. The conglomerate may repurchase its own shares at management’s discretion as long as its cash, equivalents and holdings of US Treasuries remain above $30 billion. As I highlighted earlier, that number is currently $325 billion.

That said, when a behemoth investor like Berkshire is trimming its portfolio, hoarding cash and avoiding buybacks, it’s not a good sign for the market at large. Investors shouldn’t rush to sell stocks, but they should be mentally prepared for a potential correction in the S&P 500 over the next year.

If that happens, it will almost certainly be a buying opportunity.

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Bank of America is an advertising partner of Motley Fool Money. Antoni Di Pizio has no position in any of the aforementioned stocks. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, HP and Snowflake. The Motley Fool recommends T-Mobile US. The Motley Fool has one disclosure policy.

Warren Buffett recently avoided his favorite stocks for the first time since 2018 and it could mean bad news for Wall Street was originally published by The Motley Fool

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