Few investors on Wall Street are more revered than Berkshire Hathaway (BRK.A -0.06%) (BRK.B -0.95%) CEO Warren Buffett. While Buffett's investing strategy is relatively simple, buying and holding great companies for long periods of time has worked out very well for the Oracle of Omaha. In fact, Buffett's investing prowess is so well-known that some investors mirror his buying and selling activity.
There's arguably not a more exciting event each quarter than when Berkshire Hathaway files its 13F with the Securities and Exchange Commission. Form 13F is a requirement for companies with more than $100 million in assets under management, and it allows investors to see what the brightest minds on Wall Street have been up to over the previous quarter. On Friday, Feb. 14, Berkshire Hathaway filed its 13F, which ultimately disclosed a very active quarter for Buffett and his team.
During the fourth quarter, Berkshire Hathaway opened a position in or added to eight securities. Likewise, Buffett's company also pared down its position in eight of its securities, with the amount sold outpacing the amount purchased by a significant margin ($7 billion in securities sold, versus $1.58 billion purchased).
Why did Buffett sell shares of eight stocks during the fourth quarter? Let's take a closer look.
1. Wells Fargo: 55,156,000 shares sold
For the past 2.5 years, Buffett has been paring down his company's holdings in money-center bank Wells Fargo (WFC -0.69%). Having once owned more than 479 million shares, Berkshire's latest sale, totaling more than $2.9 billion in market value, has reduced Buffett's company's stake to 323.2 million shares.
The reason for the continued selling looks to be Wall Street's and consumers' lack of trust with Wells Fargo. Remember, we're less than four years removed from Wells Fargo's fake-account scandal that saw 3.5 million unauthorized accounts created. While most banks have rallied over those four years, Wells Fargo's stock has pretty much gone nowhere. Trust is very difficult to rebuild, and Buffett realizes it.
2. Goldman Sachs: 6,348,884 shares sold
Arguably one of the tougher sells to figure out is why Buffett reduced Berkshire's stake in investment bank Goldman Sachs (GS -1.03%) by around a third. Goldman Sachs is still historically inexpensive based on its book value and forward earnings, and its fourth-quarter results featured blowout adjusted revenue and profit figures.
However, investment banking revenue declined 6% in the fourth quarter as merger and acquisition (M&A) activity slowed. With Buffett a net seller of stocks in Q4 and unwilling to put Berkshire's record cash hoard to work, it's pretty evident he's worried about the state of the U.S. and/or global economy (without actually saying so). With Goldman dependent on M&A activity and global markets, Buffett might have hedged his bet a bit against a recession by paring down his stake.
3. Travelers Cos.: 5,646,012 shares sold
The thesis for selling nearly all of Berkshire Hathaway's stake in Travelers Cos. (TRV -0.96%) likely has to do with some combination of valuation and intermediate-term interest-rate prospects.
On the valuation front, Travelers' forward price-to-earnings ratio is modestly higher than its five-year average, while its earning yield has declined noticeably over the past five years. Ultimately, this insurer's share price has more than tripled since the Great Recession but the company grows its top line at only 5% per year.
The other consideration here is that interest rates may remain low for the foreseeable future. Higher rates are preferable for insurers since they invest their float (i.e. unused premium that's been collected) to generate interest income. With yields looking dismal, Travelers' upside may be limited.
4. Phillips 66: 4,955,201 shares sold
Buffett continued to heavily sell integrated oil and gas giant Phillips 66 (PSX 0.11%) -- and that's no surprise. Berkshire has been steadily paring down its position in Phillips 66 for the past seven quarters. At one time, Berkshire held more than 80 million shares of Phillips 66 but ended December with only 227,436 shares remaining.
The writing was on the wall when Buffett pledged $10 billion to Occidental Petroleum in April 2019 to aid in its acquisition of Anadarko. It was clear then that Buffett viewed Occidental as a better long-term value than Phillips 66.
5. Apple: 3,683,113 shares sold
Investors will likely gain better clarity as to why close to 3.7 million shares of tech kingpin Apple (AAPL -3.00%) were sold during the fourth quarter when Buffett releases his annual shareholder letter. Although this sale equates to almost $1.1 billion, it's important to note that Apple still represents Berkshire's biggest holding by a longshot ($72 billion, as of Dec. 31).
One possibility is that Buffett had nothing to do with this sale. Remember, a small number of Buffett's investment team can buy and sell equities, and they might be responsible for this profit-taking move on Apple.
6. Bank of America: 2,240,000 shares sold
Easily the most benign sale of the quarter goes to Bank of America (BAC -1.50%).
Buffett has often said that he doesn't want Berkshire's investment stakes in any bank to exceed 10% because it means there will be added levels of Federal Reserve oversight if it crosses this 10% threshold. That's a problem when Bank of America is enacting massive capital return programs ($37 billion in 2019) that include hefty stock repurchases. Selling 2.24 million shares was simply a means for Buffett to bring his company's ownership stake in BofA back below 10%. In other words, the Oracle of Omaha is still a very big fan of Bank of America.
7. American Airlines Group: 1,200,000 shares sold
It's also likely that Buffett pared down his company's stake in American Airlines Group (AAL -1.71%) to stay below the 10% ownership threshold. Although American Airlines' share-buyback program has slowed in recent quarters from what it was in 2017-2018, Berkshire's selling of 1.2 million shares might simply be a reaction to American Airlines' declining outstanding share count.
Then again, it's also possible that Buffett is modestly hedging against a recession. The airline industry has historically performed poorly during recessions, and no major airline is lugging around more net debt right now than American Airlines.
8. Bank of NY Mellon: 1,172,193 shares sold
As the largest custodial bank in the U.S., Bank of NY Mellon leans on higher yields to drive its net income. However, the Federal Reserve lowered its fed funds rate by 25 basis points on three separate occasions in 2019 and is once again walking on eggshells as it attempts to feel out the U.S. economy. As a result, near-term growth prospects for the Bank of NY Mellon look tepid, at best.