When Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett speaks, Wall Street tends to play close attention. That's the respect commanded for an investor who has trounced the returns of the broad-based S&P 500 (including dividends) by more than 2,744,000% over the past 55 years.
This past weekend, Berkshire Hathaway released its first-quarter operating results and virtually hosted its annual shareholder meeting due to the coronavirus disease 2019 (COVID-19). While there were numerous nuggets of wisdom bestowed by the Oracle of Omaha on listeners regarding the long-term view on the U.S. economy and stock market, what investors were really hoping for was direct insight into what Buffett has been buying and selling during this abrupt bear market crash.
Interestingly, based on figures from the company's first-quarter report and a slide provided by Buffett during the virtual shareholder meeting, we learned that Berkshire Hathaway has been a net seller of equities since the year began. Though Buffett and his team bought $1.8 billion more than was sold in Q1 2020, Berkshire was a net seller to the tune of almost $6.1 billion in April.
What's Buffett been selling? While we won't know the complete answer to this question until Berkshire Hathaway files its 13F with the Securities and Exchange Commission (SEC) next week, we do know from verbal disclosures and SEC filings that Buffett and his team have sold five stocks thus far in 2020.
Buffett's airline holdings are grounded
If there was a "wow" moment of the Berkshire Hathaway annual meeting, it was early on in the question-and-answer portion of the meeting, when Buffett confirmed that the company had completely sold out of its positions in all four major airlines. This involved selling:
- 71,886,963 shares of Delta Air Lines (NYSE:DAL)
- 53,649,213 shares of Southwest Airlines (NYSE:LUV)
- 42,500,000 shares of American Airlines Group (NASDAQ:AAL)
- 21,938,642 shares of United Airlines (NASDAQ:UAL)
According to Buffett and the slide detailing Berkshire's net-selling activity during April, the company redeemed about $6.1 billion from its stakes in these four airlines. Unfortunately for Buffett, his initial investment in these airlines totaled in the neighborhood of $8 billion. Buffett described his decision to invest in the airline industry as a "mistake."
Though Buffett firmly believes in taking the long view when it comes to investing, the decision to sell was made easy by COVID-19. The Oracle of Omaha believes the airline industry will be fundamentally changed by this pandemic and cited a number of concerns regarding near-term and intermediate-term growth. For instance, Buffett wasn't sure if and when the number of passengers flying would return to normal, suggesting it could take many years. All the while, new plane orders from the likes of American and Delta will create a glut of aircraft.
He also highlighted the likelihood of each airline borrowing an estimated $10 billion to $12 billion that would need to eventually be paid back. These borrowings, in Buffett's mind, would eat away at the quality of airlines' earnings for the foreseeable future.
What might be overlooked among all of this is the leverage of certain airline stocks. For example, Southwest Airlines went into the coronavirus pandemic with a relatively sound balance sheet that featured $5.6 billion in cash and $6.4 billion in debt. Comparatively, American Airlines, United, and Delta were sporting net-debt positions of $30.5 billion, $18.2 billion, and $18.1 billion, respectively. They simply weren't prepared to survive an exogenous shock, which is exactly why I've always questioned Buffett's attraction to airlines.
An interest-sensitive bank is trimmed
In addition to selling off all of his airline stocks, Buffett's company filed paperwork with the SEC showing that, on April 7 and April 8, a grand total of 869,103 shares of Bank of New York Mellon (NYSE:BK) were sold, which equates to almost 1% of the 89 million shares that were held at the beginning of the year.
Buffett is a big fan of the financial sector and bank stocks, which he made clear during his shareholder meeting. He also firmly believes in betting on America over the long run. That would make banks a great place to park your capital for long periods of time.
However, Bank of NY Mellon isn't a traditional bank. Rather, it's the nation's largest custodial bank that also offers various investment management and investment strategy services. This means Bank of NY Mellon's operating performance tends to ebb and flow with prevailing interest rates. Since the Federal Reserve moved its federal funds rate back to an all-time low of 0% to 0.25% earlier this year, Bank of New York Mellon is likely to see less in the way of net interest income for the foreseeable future. That means less of an opportunity for the company to grow its dividend, which is the dangling carrot that attracts most investors.
But the biggest reason Buffett may have been a seller likely has to do with Bank of New York Mellon's aggressive common stock repurchase program. Last June, BNY Mellon's board approved up to $3.94 billion in share repurchases through the second quarter of 2020. As the number of outstanding shares decreases, Berkshire's ownership stake in the company increased past 10%. Owning more than 10% of a financial institution can lead to increased oversight from the Fed.
Thus, Buffett's sale of Bank of NY Mellon stock looks to be motivated more by regulatory concerns than anything fundamentally wrong with the business.