Following the closing bell this past Friday, May 15, perhaps the most-anticipated Securities and Exchange Commission filing of the month became public. Namely, the Form 13F filing from Warren Buffett's company, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).
Form 13F is a required filing for companies with more than $100 million in assets under management, and it essentially provides a snapshot of what money managers were holding in their portfolios at the end of the most recent quarter (in this case, March 31, 2020). Considering that we just witnessed the fastest bear market decline in history, Wall Street and investors were particularly interested to see what the Oracle of Omaha has been up to during the first quarter.
Though most of the buying and selling was relatively nominal, three of the moves made by Buffett and his team can be categorized as particularly surprising.
Buffett dramatically pares down his company's stake in Goldman Sachs
Arguably the biggest transaction that stands out is Buffett and his team paring down its Goldman Sachs (NYSE:GS) stake by 84%, or almost 10.1 million shares. This comes after more than 6 million shares of Goldman were sold during the sequential fourth quarter.
There are two factors that make selling down investment bank Goldman Sachs particularly head-scratch-worthy. To begin with, the company's first-quarter results were stellar, all things considered. Obviously Buffett had no knowledge of how well Goldman Sachs would perform in Q1, but the company wound up delivering its highest revenue-generating quarter from its fixed income, currency and commodities segment in five years, and its second-best quarter in five years from equities.
The other factor here is that Goldman Sachs is currently only trading at 75% of its book value, which would represent its lowest valuation, relative to book, since 2011. Buffett has always been a big fan of value, and Goldman Sachs appears to offer that to long-term investors at the moment.
So, why sell? One possibility is that Buffett was simply locking in gains from when he initially took a position in Goldman Sachs earlier in the decade. Buffett's tendency to use recessions as a buying opportunity allowed him to make sizable gains on Goldman Sachs.
The other possibility here is that Buffett and/or his team fear an oncoming recession. This wouldn't seem to be the case, with Buffett echoing throughout Berkshire's annual meeting on May 2 how he would never bet against America. But there is a real likelihood that merger and acquisition activity, along with corporate consultancy needs, could fall significantly in the quarters to come.
Say what? Selling shares of JPMorgan Chase!
Although the mammoth sale of Goldman Sachs is liable to catch the attention of most investors, the jaw-dropping moment for me was seeing that Buffett had sold 1.8 million shares of JPMorgan Chase (NYSE:JPM). Even though this only represents a decline of 3% from Berkshire's holdings in the previous quarter, it's surprising for a variety of reasons.
First of all, Buffett is a big fan of bank stocks, and money-center giant JPMorgan is typically one of the best performers. It offers one the highest return on assets among big banks, and has steadily grown the bread and butter of its consumer banking business (i.e., loans and deposits). With JPMorgan Chase's stock losing nearly 40% of its value and retracing to fairly close to its book value in March, purchasing activity, not selling, is what I'd have expected from Buffett.
Another key point is that Buffett greatly admires JPMorgan Chase CEO Jamie Dimon. The Oracle of Omaha has previously noted that he'll read Dimon's annual letter to shareholders to get a good feel for what's really going on in the banking industry. Though Dimon had a health scare earlier this year, he's back on the job, once again, and doesn't look to be going anywhere anytime soon.
JPMorgan Chase is also one of the few banks that's been able to grow both its digital and physical presence. It's seen steady increases in the number of members transacting online, but has also been willing to open dozens of new physical branches in what it perceives to be underbanked regions of the country.
Frankly, I'm beyond baffled as to why Buffett reduced his stake in JPMorgan Chase by 1.8 million shares.
Berkshire's Amazon stake gets clipped
The final surprise among the roughly 22 moves made by Berkshire Hathaway during the first quarter was the paring down of e-commerce kingpin Amazon (NASDAQ:AMZN). Though only 4,000 shares were sold, which accounts for just 0.7% of Berkshire Hathaway's 537,300-share position heading into the year, the fact that anyone would be selling Amazon right now is shocking.
Within the retail space, very few companies have benefited from the coronavirus disease 2019 (COVID-19) pandemic, albeit Amazon has been one. With Americans stuck at home for much of the past two months, they've been purchasing as much as possible from online sources. That's made Amazon and its ecosystem of products a popular destination.
More specifically, we've seen Amazon's Prime membership fueling its competitive advantage in the retail space. The revenue raised from the more than 150 million Prime members worldwide helps to partially offset thin retail margins, while also providing Amazon with a cushion to continue undercutting brick-and-mortar competitors on price.
There's also Amazon's rapidly growing infrastructure cloud service, Amazon Web Services (AWS). In the most recent quarter, AWS sales jumped by 33% year-over-year to $10.2 billion, with AWS accounting for 13.5% of companywide sales, up from just 11% for full-year 2018. Since cloud margins are substantially higher than any of Amazon's other business segments, the company can expect an explosion in operating cash flow in the years to come as AWS grows in size.
Even though it's only 4,000 shares, my suspicion is Buffett and his team will come to regret its first-quarter sale.