Warren Buffett’s company Berkshire Hathaway has bought very few stocks this year. But that could be about to change.
With the stock market ripping, Warren Buffett and his company Berkshire Hathaway (BRK.A 1.32%) (BRK.B 1.16%) are likely enjoying profits in their $300 billion-plus equities portfolio. But they haven’t added many new positions. Through the first six months of the year, Berkshire has only purchased $4.3 billion of equities versus $97 billion of sales. This pales in comparison to the $16.5 billion of equities Berkshire bought in 2023 and the nearly $68 billion in 2022. However, all this could be about to change, and there are 271 billion reasons why.
Berkshire has a war chest and may be looking in the Far East
It has been well documented that Berkshire has built up a massive hoard of cash and short-term Treasury bills. At the end of the second quarter, Berkshire had nearly $37 billion of cash and roughly $236.4 billion of short-term Treasuries, for a total of roughly $271 billion in cash and cash equivalents. This is up from $163 billion of cash and cash equivalents at the end of 2023.
Recent analyst reports suggest Berkshire may be looking in the Far East to Japan, a country that Buffett and Berkshire have made moves in before. In August 2020, Berkshire purchased a 5%+ stake in each of Japan’s five largest trading companies — Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. In June 2023, Berkshire increased its position in each of these companies to between 7.5% to 8.6%. Buffett has previously said that Berkshire intends to hold these companies long-term and will not purchase more than 9.9% of either company.
Analysts believe Buffett and Berkshire may be ready to buy more stocks in Japan after filings showed that Berkshire is planning to commence a Yen bond sale, which is how Berkshire has financed prior purchases of Japanese stocks. Some analysts believe Buffett will target Japanese insurers and shippers, or even banks, which have grown attractive from a valuation perspective.
The Bank of Japan has begun to raise interest rates, which could help the sector, although Prime Minister Shigeru Ishiba recently tempered that sentiment by telling reporters he does not believe further rate hikes are warranted in Japan’s current economic climate. Buffett is known as a value investor, so bank stocks at attractive valuations could fit into his strategy. However, some think Japanese banks wouldn’t make sense, given that Buffett has been selling stock in Bank of America.
The environment is less favorable for hoarding cash
With interest rates above 5%, Berkshire and Buffett didn’t have to reach to buy stocks. That’s because they could simply dump cash into short-term Treasury bills and earn over 5%, which will beat many dividends. It also makes buying riskier stocks less enticing. In 2021, Berkshire made about $7.5 billion in interest, dividends, and other investment income. In 2023, that number jumped to $15.6 billion.
Now, the Fed has begun a rate-cutting journey. As Berkshire reinvests cash, Treasury bills will start to yield less, which makes dividends and stocks more attractive. The stock market has been crushing it and is now up more than 21% this year. Buffett seems to believe the market is overheated. Earlier this year, Berkshire sold more than half of its position in Apple (NASDAQ: AAPL), its largest holding and favorite stock since 2016.
However, due to changes in market structure, tech and growth stocks have consumed a much larger share of the broader market and its gains. There are still lots of stocks trading at favorable valuations. Also, just because Buffett is a value investor doesn’t mean he won’t buy stocks trading at big valuations if he deems the valuation fair. Many times, Buffett has said that buying wonderful companies at fair prices is a winning strategy.
Back to core value?
It’s hard to know exactly what one of the greatest investors of all time will do next. But I think Japan is certainly a possibility given the bond sale. With stocks in the U.S. getting expensive, I could see Buffett getting interested in foreign markets, which haven’t fared as well. I also wonder if Buffett will start to focus on good dividend stocks in the falling rate environment. Buffett loves companies that return capital to shareholders.
For instance, one position in Berkshire’s portfolio strikes me as a perfect stock to own in this environment. Berkshire has acquired a nearly 3% stake in the large money-center bank Citigroup (NYSE: C). Citigroup currently pays nearly a 3.5% dividend yield and still trades at a significant discount to its tangible book value or net worth.
This strategy could make sense in the current environment: Buy a good dividend-paying stock with less valuation risk. Berkshire also recently increased its stake in the beaten-down Sirius XM Holdings (NASDAQ: SIRI), which pays a nearly 4.7% dividend yield. So we’ll see what happens, but I think market conditions are ripe for Buffett and Berkshire to return to their core value strategy.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Bank of America and Citigroup. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.