On Wall Street, there may not be a more revered investor than Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett. Since the 1950s, Buffett has used his investing prowess to grow his net worth from $10,000 to almost $74 billion. Keep in mind that this figure doesn't account for the tens of billions the Oracle of Omaha has donated to charities over the years. He's also generated close to $400 billion in value for Berkshire Hathaway shareholders over the past five-plus decades.
Suffice it to say that when Buffett speaks, Wall Street listens – and over this past weekend he did a lot of speaking. That's because Saturday, May 2, 2020, marked the release of Berkshire's first-quarter operating results, as well as the company's annual shareholder meeting.
There were obviously a lot of questions on the minds of investors heading into this meeting, such as how the coronavirus disease 2019 (COVID-19) would affect Buffett's roughly five dozen fully owned businesses. But one question stood head and shoulders above all else heading into this past weekend's earnings release and annual shareholder meeting: Did Buffett and his team put the company's near-record $128 billion cash hoard to work?
That question has finally been answered.
Buffett's near-record cash pile has grown even larger
Following the release of Berkshire Hathaway's Q1 2020 report, we can see that the company's cash, cash equivalents, and short-term investment in U.S. Treasury Bills has (drum roll)... grown to an all-time record $137.2 billion.
Putting aside Treasury-bond buying and selling activity, Berkshire's cash flows in the first quarter show that his company purchased $4.003 billion in equity securities and sold or redeemed $2.166 billion of equity securities. In other words, Berkshire was a net buyer of equities in the first quarter, but only put a total of $1.837 billion to work despite the stock market face-planting 34% in a 33-calendar-day stretch. Considering that Berkshire's investment portfolio was worth over $190 billion, as of this past weekend, and the company has tens of billions in value based on the five dozen or so companies it fully owns, $1.837 billion in net purchases is a drop in the bucket for the fastest bear market correction in history.
What's more, while discussing Berkshire's operational performance and other matters prior to the question and answer session, Buffett posted a slide of Berkshire's investment activity for the month of April. In total, Berkshire purchased $426 million in equities while selling $6.509 billion in stock (primarily airlines). This will, in all likelihood, increase Berkshire Hathaway's cash hoard even more.
Why isn't Buffett putting Berkshire Hathaway's cash to work?
Why on Earth isn't the Oracle of Omaha putting his capital to work with equity prices depressed from where they were just a few months ago? I suspect the answer boils down to four factors.
First off, although Buffett doesn't allow fear to dictate his investments, he's clearly concerned about the coronavirus pandemic. In fact, Buffett plainly stated on a handful of occasions that he just doesn't know what's going to happen in the near term. During the Q&A session, Buffett suggested that while the probability of numerous exogenous shocks to the company's core businesses (e.g., insurance) is small, it can't be discounted in the current environment. Or in Buffett's view, hanging onto excess cash is warranted given the circumstances.
Secondly, Buffett has hinted that he's not exactly a fan of equity valuations. We are coming off one of the highest readings for the Shiller price-to-earnings ratio -- a P/E ratio based on average inflation-adjusted earnings from the previous 10 years -- since 1870. Further, during the Q&A session, Buffett responded to a question concerning why it hasn't been a lender during the coronavirus pandemic by noting that he hasn't seen any attractive offers. Buffett believes in America and would never flat-out say that the stock market is expensive knowing full-well that equity prices will rise over the very long term. However, his actions and occasional comments suggest he's not intrigued with stock valuations at the moment.
Another factor to consider is that Buffett tends to focus his research on very concentrated areas of the stock market. Generally, he devotes his attention to the financial sector, consumer discretionary companies, and to some smaller extent brand-name industrials. While I think it's very important that an investor focuses on industries and sectors they know and are interested by, Buffett's core concentrations may be causing him to miss value in other areas of the stock market. Healthcare stocks, such as profitable biotech companies, are near historic lows in terms of forward price-to-earnings multiple. Buffett may not have a broad enough glimpse of the market to see where value is lurking.
Finally, previous Berkshire Hathaway annual meetings have shown that Buffett has a desire for future acquisitions to be "needle movers." By this, he means that he'd like the companies being acquired to contribute meaningfully to the company's bottom line. This means Buffett and his team aren't angling to make $1 billion buyouts. Rather, they're looking for elephant-sized deals -- and these simply don't materialize very often.
There's no question that the Oracle of Omaha still believes in the stock market as America's greatest wealth creator. But Buffett's growing cash pile isn't going to inspire confidence at a time when most investors' resolves have been tested like never before.