It shouldn't be too big of a surprise that Warren Buffett has soured on IBM (IBM +0.34%). The Oracle of Omaha has been unloading his position in Big Blue all year. But IBM isn't the only stock Buffett's been reducing in Berkshire Hathaway's portfolio. He's also been selling Charter Communications (CHTR 25.32%) and, a bit more surprisingly, Wells Fargo (WFC 1.35%). Are the best days behind these stocks?
Too big to turn
Big ships can't turn on a dime, and IBM is a freighter. Plans to reshape IBM back into a growth company are taking forever, and apparently, Warren Buffett's done waiting. He's been steadily selling Berkshire Hathaway's massive stake in IBM all year.
IMAGE SOURCE: MOTLEY FOOL.
IBM was once one of his biggest positions -- he owned over 80 million shares -- but he sold 17 million shares in Q1, nearly 10 million shares in Q2, and another 17 million shares in Q3. As of September 30, he only has 37 million shares left. I suspect that number is even lower now.
IBM was formerly a technology powerhouse, but declining demand for its legacy technology solutions hasn't been fully offset by growing demand for its strategic-imperatives businesses. As a result, its year-over-year revenue has declined in 22 straight quarters. During the past three years, trailing 12-month sales have fallen from more than $100 billion to less than $80 billion, despite its investments in the fastest-growing parts of its business, such as cloud computing.
IBM's sales only fell 0.4% from one year ago in Q3, but flat isn't very inspiring. Until strategic-imperatives revenue represents a large enough share of sales to return this company to growth, IBM's shares are likely to remain under pressure. Those businesses produced $34.9 billion in revenue over the trailing 12 months, representing 45% of IBM's total revenue, and sales grew 11% year over year in Q3. IBM's heading in the right direction, but there's still work to be done.
Could IBM become a bargain-basement buy at some point? Maybe. It's typically been smart to buy IBM when its trailing 12-month price-to-earnings (P/E) ratio is about 9.5. It's about 12.4 right now, so share prices will need to fall further, or we'll have to see some significant earnings expansion to get to that level again. Until then, it's hard to argue that there aren't better investment ideas out there. It seems Buffett agrees.
IBM PE Ratio (TTM) data by YCharts.
Cutting the cord
Warren Buffett added Charter Communications to his portfolio in 2014, and over the past three years, he's more than doubled his money. Apparently, that gain is a bit too much for Buffett to pass up because he sold 10% of his Charter Communications stake in the third quarter.
Charter Communications has been on a roll since 2016 when it completed its acquisitions of Time Warner Cable and Bright House. Share prices got an additional boost earlier this year when rumors emerged that Verizon (VZ 1.78%) had approached it about an acquisition, too. However, Charter Communications has given back some of its gains since CEO Tom Ruttledge dashed takeover speculation in September, saying the company's fine going it alone.
Perhaps Charter Communications' decision to stay single is enough of an incentive for Buffett to want to book his profit. He still owns 8.5 million shares, so we'll need to see what happens in the fourth quarter before we know for certain that he's moving on to other stocks. In the meantime, I don't see much reason to buy Charter Communications following the past year's rumor-fueled run-up.
IMAGE SOURCE: WELLS FARGO.
Bailing on his biggest bank?
Let's face it... Wells Fargo has lost some of its allure since admitting that workers opened millions of fake accounts to meet heavy-handed sales goals. But that doesn't mean that Buffett's bailing on his second-largest holding.
Yes, he did finish last quarter with 3.8 million fewer shares than he began the quarter, but his selling was only to keep Berkshire Hathaway's ownership below 10% so that he could avoid Berkshire Hathaway being classified as a bank holding company. Since Wells Fargo has a big buyback program that's continuously reducing its share count, Warren Buffett has to trim his position every quarter just to maintain it at his target 9.8% ownership level.
Although Buffett hasn't soured on Wells Fargo, you might want to. Despite industry tailwinds, including a strong economy and rising interest rates, Wells Fargo's adjusted earnings fell year over year, to $1.04 per share. Its net interest income was flat and its net interest margin, or the spread between how much it pays to fund loans and how much it collects in interest, declined to 2.87% quarter over quarter. Noninterest income, mortgage banking income, and total loans also dipped sequentially.
Overall, there's no denying that Wells Fargo will remain a banking giant, but I expect its growth from here will be more tepid than it's been in the past. If so, investors might do better buying a different bank stock.
Investor takeaway
Warren Buffett's famous for his disciplined investment approach. His ability to turn over stones and thoroughly understand opportunities and risks allows him to ride out a stock's inevitable downturns more easily than others.
Given his penchant for patience, his selling of shares in IBM and Charter Communications should give investors in those two stocks pause. At a minimum, it suggests going back to your investment diary to make sure the reason why you bought shares still is valid.
As for Wells Fargo, it's a different story. Buffett seems committed to keeping his ownership in the bank just underneath the crucial 10% mark. As long as this is true, he won't be propping up Wells Fargo's price by buying more shares. Instead, Wells Fargo is going to trade higher or lower based on its ability to move beyond its account scandal, boost its loan growth, and increase its profit. There's an opportunity for it to do that, but that doesn't mean that it's the best bank stock for new investors to be buying.
