Warren Buffett manages a massive stock portfolio worth about $366 billion for Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), but he's been slowly culling his equity positions in 2023. The Oracle of Omaha and his team sold $32.8 billion worth of shares during the first nine months of the year, and spent just $9.1 billion purchasing new shares in that same period.
Buffett's latest sale is Hewlett Packard (HPQ -0.46%). Recent filings with the Securities and Exchange Commission (SEC) reveal that Berkshire Hathaway trimmed its position in the PC and printer maker by nearly half between Oct. 3 and Nov. 30, leaving it with 51.5 million shares. The sale of 46.4 million shares likely generated about $1.3 billion based on HP's average stock price during November. That followed Berkshire's sale of about 23 million shares (generating $619 million) in late September and early October.
The conglomerate still holds a substantial stake in HP, but it wouldn't be a surprise if Buffett continued cutting its position.
Image source: The Motley Fool.
Cutting his losses and moving on
Buffett established a position in HP in the first quarter of 2022. Following the surge in PC and printer sales earlier in the COVID-19 pandemic, the outlook for HP in the new work-from-home economy looked promising. Strong free cash flow generation and a generous capital return program for a stock trading at a relatively low valuation made HP a classic Warren Buffett investment.
But things didn't quite pan out as expected. Net revenue pulled back in 2022 and continued falling in 2023. Sales declined 14.6% this year. Earnings per share (EPS) fell 17.6% on a non-GAAP basis. And free cash flow declined 20%.
What's more, management's outlook for 2024 doesn't inspire a lot of confidence that there will be a quick turnaround for the business. Management expects EPS growth of 5% at the midpoint of its guidance range, still well below 2022 levels. Despite an expected recovery in free cash flow, HP will still generate less cash than it did pre-pandemic. That said, management plans to return 100% of its free cash flow to shareholders in 2024 after a paltry amount of share repurchases in 2023.
The long-term outlook for HP's two main businesses isn't that great. The printing segment should decline as more and more businesses push to go paperless. And with more businesses asking employees to return to the office, its consumer printing segment (down 21% last quarter) will continue to decline.
The PC market should see a slight recovery in 2024 after 2023's massive decline. But growth will be slow. International Data Corporation forecasts a 3.7% increase in PC sales next year, and average growth of 3.1% per year between 2023 and 2027. However, it expects Apple to take market share, leaving other PC makers treading water.
With the outlook for HP worsening, it's no surprise Buffett and his team have decided to cut their losses.
What's Buffett's next move?
While Buffett has been a net seller of stocks in 2023, he's built up a massive holding in another security: short-term U.S. Treasuries.
Berkshire Hathaway held a whopping $126.4 billion in Treasury bills with maturities between three months and 12 months as of September 30. The conglomerate's balance sheet showed another $30.8 billion in cash and equivalents, which may include Treasuries maturing within three months.
Since Buffett hasn't seen a lot to get excited about in the stock market, and yields on Treasuries remain relatively high, it's a good bet he'll keep a good amount of money in the short-term bonds.
But there are a couple of stocks Buffett might be buying with at least some of the cash generated from the sale of HP stock.
One of the biggest stock purchases Berkshire Hathaway made last quarter was kept confidential on its quarterly 13F filing with the SEC. Institutional investors with over $100 million in assets are required to file 13F forms, which disclose their portfolio holdings at the end of every quarter. Buffett and his team, however, were able to omit one or more of its holdings last quarter. That's likely because he's looking to buy more.
We don't know much about the mystery stock. However, disclosures in Berkshire Hathaway's third-quarter earnings report suggest that it could be in the financial sector. The cost basis of the holding company's investments in bank, insurance, and financial stocks increased by about $1.2 billion despite the sales of several financial stock positions.
The other possible stock Buffett might buy is his own. Since a rule change that loosened the requirements for Berkshire Hathaway to repurchase shares, the company has bought back shares every quarter. While the stock has moved higher recently, it still trades below its September high. Buffett bought back $665 million worth of shares that month. It's a good bet that he still sees value in his own company's stock.
