When Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) CEO Warren Buffett speaks, Wall Street and investors wisely pay close attention. That's because the Oracle of Omaha has delivered an aggregate return on the company's Class A shares (BRK.A) of 3,641,613% during his 57 years at the helm (through Dec. 31, 2021).
While riding Buffett's coattails has been a moneymaking strategy for decades, it's equally important to take note of the stocks that the world's most successful investor and his investing team are selling or avoiding. Thus far in 2022, Warren Buffett has overseen the aggressive selling of the following five stocks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Wells Fargo: Sold all shares
This year marks the end of an era for Warren Buffett and Berkshire Hathaway. During the first quarter, Berkshire's final 675,054 shares of money-center bank Wells Fargo (WFC 2.73%) were sold. It's the first time since 1989 that Wells Fargo isn't a continuous holding in Berkshire's portfolio.
Although bank stocks are Buffett's favorite industry to invest in, Wells Fargo broke a cardinal rule when it violated the trust of its customers. In 2016 and 2017, Wells Fargo admitted that approximately 3.5 million unauthorized accounts were opened at the branch level between 2009 and 2016. This admission caused a short-term carousel among the company's executives, and ultimately led to a whopper settlement of $3 billion with U.S. regulators. Because it can be difficult for a company to rebuild its reputation, Buffett headed for the exit.
Interestingly, though, Wells Fargo has performed fairly well over the past two years. This is a bank that has a rich history of attracting a more affluent clientele. People with higher incomes are less likely to be shaken off their proverbial foundations by economic contractions, and that's helped Wells Fargo deliver some of the highest return on assets among money-center banks.
In other words, Buffett might eventually regret selling his company's remaining stake in Wells Fargo.
Bristol Myers Squibb: Sold all shares
A second well-known company that was given the heave-ho since the year began is pharmaceutical stock Bristol Myers Squibb (BMY 0.96%). All 5,202,674 shares that Berkshire held at the end of 2021 were disposed of during the first quarter.
Berkshire Hathaway piled into a number of high-profile drugmakers more than a year ago, likely with the intent of capitalizing on their COVID-19 research, as well as benefiting from their high dividends and relatively steady operating cash flow. However, Bristol Myers Squibb never became a major player in the COVID-19 treatment space. Worse yet, blockbuster cancer drug Revlimid has begun experiencing modest revenue erosion from generic competition. These latter two factors are my best guesses as to why Bristol Myers Squibb was given the boot.
But when looked at with a broad lens, Bristol Myers is an inexpensive cash cow that still seems to have room to the upside. Oral anticoagulant Eliquis, which was developed in cooperation with Pfizer, has surpassed Revlimid in full-year sales. And cancer immunotherapy Opdivo has a real chance to leapfrog $10 billion in annual sales, thanks to label-expansion opportunities.
At only 9 times Wall Street's forecast earnings for 2023, Bristol Myers Squibb offers a reasonable risk-versus-reward profile for patient investors.
Image source: Getty Images.
AbbVie: Sold all shares
Bristol Myers isn't the only big drugmaker dumped by Warren Buffett's company this year. AbbVie (ABBV 0.25%), which was initially purchased by Berkshire Hathaway in 2020, was completely sold. Buffett and his investing team jettisoned all 3,033,561 shares held at the end of 2021.
The basis for selling all shares of AbbVie likely mirrored the reasoning for ditching Bristol Myers Squibb. Although AbbVie provided stability during uncertain times for investors, the company never became a big player in the COVID-19 landscape. Furthermore, its lead drug, anti-inflammatory therapy Humira, is also beginning to face biosimilar competition in international markets. While Humira sales in the U.S. rose 2.2% in the most recent quarter, international sales plunged 22.6% from the prior-year period.
Despite AbbVie remaining inexpensive at 12 times Wall Street's forecast earnings for 2023, Buffett's exit in this instance might make sense. Humira accounted for 35% of global net revenue in the first quarter, and biosimilar competition will eventually eat into its sales in the U.S. as well. Even though AbbVie acquired Allergan in 2020 to diversify its sales and product development pipeline, it's difficult to envision AbbVie's bottom line not taking a big hit in the coming years due to a reduction in Humira sales.
Royalty Pharma: Reduced by 82%
Keeping with the theme somewhat, Berkshire Hathaway's stake in Royalty Pharma (RPRX 1.01%) has been greatly reduced since the year began. A total of 7,151,896 shares were sold, leaving just shy of 1.5 million shares still in the portfolio of Buffett's company.
Royalty Pharma, which generates royalty payments from the net sales of more than 35 approved drugs, was only initially added to Berkshire's portfolio during the third quarter of 2021. Paring down this stake by 82% somewhere between six and nine months later potentially signals that this was a move made by one of Buffett's investing lieutenants, Todd Combs or Ted Weschler. Rarely does Warren Buffett hold a position for only a few months.
As for the reason Berkshire Hathaway dumped 82% of its position in Royalty Pharma, I'd opine it has to do with upcoming losses of exclusivity that are expected to hit the company's royalty stream. For example, Humira is one of the more than 35 therapies Royalty Pharma generates revenue from. With a slew of Humira biosimilars set to launch in the U.S. next year, we may be witnessing a near-term royalty revenue peak for the company.
Verizon Communications: Reduced by 99%
The fifth and final stock Warren Buffett has aggressively sold in 2022, and arguably the most surprising of all, is telecom behemoth Verizon Communications (VZ 0.88%). The Oracle of Omaha's company sold 157,444,464 shares of Verizon in the first quarter. As of the end of March, only 1,380,111 shares remain.
What's so odd about this sale is that Verizon was a top-10 holding for Berkshire Hathaway for only about a year. To reiterate, Warren Buffett typically buys great companies that he intends to hold for long periods. To see Berkshire Hathaway diving in and out of stocks in short time frames is....odd.
If there's an impetus to this large sale, it could be historically high inflation. When the price for goods and services rapidly rises, it tends to hurt the lowest decile of earners the most. Even though wireless access and smartphones have effectively become basic necessities over the past decade, inflation is curbing the spending capacity of consumers. Not surprisingly, Verizon cautioned Wall Street to expect full-year profits to come in at the lower end of its previously issued forecast in its first-quarter earnings release.
The silver lining with Verizon is that there are rarely surprises. Wireless churn rates tend not to rise much during economic contractions, and shares of Verizon are reasonably de-risked at just 9 times Wall Street's forecast earnings in 2022 and 2023. Tack on a 5% dividend yield and you have a boring, yet potentially profitable, place for conservative investors to put their money to work.
