On Wall Street, Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), is an investing icon. Since taking the helm more than five decades ago, he's led his company's share price to aggregate gains of more than 2,800,000%! On an annualized basis, we're talking about 56 years of averaging a 20% annual return.
Suffice it to say, when Buffett and his investing team buy or sell a stock, investors pay close attention.
This past week, Berkshire Hathaway lifted the hood on its portfolio by filing Form 13F with the Securities and Exchange Commission. All told, the Oracle of Omaha's company took one new position (Aon), added to four existing holdings, completely sold out of two positions (Synchrony Financial and Suncor Energy), and reduced 11 additional stakes in the first quarter.
But this 13F filing doesn't tell the full story of what's truly going on with Buffett's investment portfolio. Here's what a deeper dive into the tea leaves tells us about what he is thinking and where Berkshire Hathaway is headed next.
Warren Buffett remains skeptical of stock valuations
For folks unwilling to dust off their calculators, let me give you the bad news: Buffett and his team were net sellers of equities in the first quarter. This means that in three of the past four quarters -- Q2 2020, Q4 2020, and now Q1 2021 -- Berkshire Hathaway has sold more stock than it's bought, not including share repurchases.
If you're wondering why Buffett isn't chasing after one of the strongest bounce-back rallies in history, the answer is likely valuation. His long-term success has come on the back of buying value stocks and dividend payers, not chasing after high-growth tech stocks.
The issue is that stocks are historically pricey, and finding traditional value is difficult at the moment. The S&P 500's Shiller price-to-earnings ratio nearly hit 37 on May 20, which represents a more than doubling of its 151-year average of 16.82. For some context, it's been nearly two decades since the S&P 500's Shiller P/E ratio was this high.
Buffett probably also has a tough time accurately valuing businesses that are reliant on intangible assets and intellectual property. After all, he has made a living evaluating bank stocks and consumer goods companies that have hard assets on their balance sheet.
Though Buffett would never come out and say so, he's unlikely to put the bulk of Berkshire Hathaway's cash hoard to work until equity valuations depress considerably.
Wells Fargo broke the golden rule
There are few investors, if any, who get quoted more by financial media and investors than Buffett. You could make novels out of the nuggets of wisdom uttered by him during shareholder meetings and sit-down chats with networks like CNBC.
Yet there aren't too many things companies can do to get on Buffett's bad side. He fully understands that contractions and recessions are a normal part of the economic cycle, and he almost always looks past these speed bumps as temporary. In other words, he's not fast on the trigger to hit the sell button when companies he owns underperform.
But there's one golden rule that, if broken, means getting the boot from Berkshire Hathaway's portfolio -- and Wells Fargo (NYSE:WFC) broke it.
Between 2009 and 2016, Wells Fargo opened approximately 3.5 million unauthorized accounts in an effort to meet aggressive cross-selling goals at the branch level. The company subsequently paid billions in fines to the U.S. Justice Department. The problem is that Wells Fargo violated the trust of its customers, and its management team (which had three CEOs in a three-year stretch) betrayed the trust of shareholders. It's no coincidence that Berkshire Hathaway's second-longest-tenured holding (32 years and counting), which once totaled almost 480 million shares, has now been pared down to less than 1 million shares since this scandal became public.
Buffett will tolerate a business attempting to effect a turnaround, but he won't stand for a company with a tarnished reputation.
Buffett continues to cede control to his investing lieutenants
Lastly, it's become abundantly evident that Warren Buffett has ceded a lot of day-to-day control of Berkshire Hathaway's investment portfolio to his lieutenants, Todd Combs and Ted Weschler.
How do we know this? For starters, 18 of the 48 holdings in Berkshire Hathaway's portfolio in the first quarter were either axed completely, reduced, added to, or initiated. Historically, a busy quarter with Buffett at the helm would involve a single-digit number of combined buys and sells.
Additionally, Buffett isn't the type of investor to slowly pare down stakes in companies he no longer believes in (see Wells Fargo). Yet, in the first quarter, we witnessed moderate selling in pharmaceutical stocks like Bristol Myers Squibb, AbbVie, and Merck.
To underscore this point, Warren Buffett has a tendency to buy and hold investments for years. Oil and gas giant Chevron, which was initially added in the fourth quarter, had its stake cut by 51% during the first quarter. This is certainly nothing Buffett would ever do.
But the telltale evidence is what Berkshire Hathaway has been buying. For instance, Buffett hasn't the desire or time to keep up with clinical trials and drugs' exclusivity patent cliffs. This means Berkshire's push into drug stocks has almost certainly been the doing of Combs and Weschler.
The point is this: The traditional "Buffett portfolio" we've been used to for decades is now a thing of the past. While he retains control over core stakes, such as Coca-Cola, Apple, and Bank of America, the remainder of Berkshire Hathaway's portfolio has become more actively managed under the watchful eyes of Combs and Weschler. Though it's not yet clear what that'll mean for future returns, Buffett has unwavering confidence in his investing lieutenants.