Though there are a number of prominent money managers on Wall Street, none garner as much attention from professional and everyday investors as Berkshire Hathaway's (BRK.A 0.35%)(BRK.B 0.58%) Warren Buffett.
In the six decades since the aptly named "Oracle of Omaha" became CEO, Berkshire's Class A stock has cumulatively gained more than 5,500,000%. It's why investors closely follow his trading activity using Form 13Fs and Berkshire Hathaway's quarterly operating results.
However, the long-term investment approach Buffett preached for so many decades doesn't always line up with his short-term trading activity. Nevertheless, Buffett's undisputed favorite stock to buy is back on the radar and virtually guaranteed to be bought in 2025.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett's $166 billion warning to Wall Street has become deafening
To reiterate, Warren Buffett is an optimist who has repeatedly cautioned others not to bet against America. Although he realizes that U.S. recessions and stock market corrections are a normal part of the respective economic and investing cycle, periods of economic growth and bull markets on Wall Street last significantly longer than downturns. As such, he's positioned Berkshire's 44-stock, $297 billion investment portfolio to take advantage of these long-winded expansions.
But the Oracle of Omaha is also an unwavering value investor who won't chase stocks higher when their valuations don't make sense.
Over the last eight reported quarters (Oct. 1, 2022 – Sept. 30, 2024), Buffett and his top advisors, Todd Combs and Ted Weschler, have sold an aggregate of $166.2 billion more in stock than they've purchased. This includes dumping more than 615 million shares of top holding Apple, as well as jettisoning at least 26% of Berkshire's stake in Bank of America.
During Berkshire Hathaway's annual shareholder meeting in early May 2024, Buffett opined that corporate income tax rates were expected to climb, which in hindsight is unlikely to happen with Republicans controlling both houses of Congress and Donald Trump returning to the White House. Locking in gains in Apple and Bank of America at an advantageously low tax rate may partly explain Berkshire's persistent selling spanning two years.
S&P 500 Shiller CAPE Ratio data by YCharts.
However, a more likely explanation is that the stock market is historically pricey and Berkshire's chief is struggling to find anything of value to buy. In December, the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio), hit its third-highest reading during a continuous bull market since January 1871.
To add, the so-called "Buffett Indicator," which divides the value of all publicly traded companies into U.S. gross domestic product, recently hit an all-time high.
Eight consecutive quarters of persistent selling has increased Berkshire's combined cash, cash equivalents, and U.S. Treasuries on its balance sheet to a record $325.2 billion, as of Sept. 30.
Image source: Getty Images.
Berkshire's record cash hoard means Buffett is likely to be a buyer of his favorite stock
The Oracle of Omaha has seen his fair share of stock market corrections and bear markets over six decades, and he's demonstrated a willingness to sit on his hands until valuations become palatable and/or advantageous price dislocations arise.
But there's one stock Buffett loves to buy where valuation rarely comes into play -- and it isn't a holding listed in Berkshire's quarterly Form 13F filings. You'll find detailed activity of Buffett's favorite stock to buy just prior to the executive certifications in Berkshire Hathaway's quarterly operating results... because his favorite stock is none other than shares of his own company.
Prior to July 2018, Buffett and late right-hand man Charlie Munger were only allowed to undertake share repurchases if Berkshire Hathaway's shares fell to or below 120% of book value (i.e., no more than 20% above book value, as of the most recent quarter). Since Berkshire's stock never hit this line-in-the-sand threshold, the company's dynamic duo wasn't able to put a red cent toward buybacks.
Everything changed on July 17, 2018, which is when Berkshire's board amended the rules governing share repurchases to give Buffett and Munger more leeway to buy back their company's stock. The new rules place no ceiling or end date on buybacks as long as Berkshire Hathaway has at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Buffett believes his company's shares are intrinsically cheap. This last part is left intentionally vague to give the Oracle of Omaha the liberty to buy shares essentially anytime he chooses.
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Key Data Points
For 24 consecutive quarters (July 1, 2018 – June 30, 2024), Buffett green-lit the repurchase of his favorite stock to the cumulative tune of roughly $78 billion.
Although Warren Buffett didn't buy shares of Berkshire Hathaway during the September-ended quarter, he now has a record 325 billion reasons to repurchase his company's stock.
If nothing else, consistently buying back Berkshire's stock is rewarding the company's shareholders and emphasizing the importance of long-term investing. As the company's share count declines, the ownership stakes of its shareholders incrementally rises.
Additionally, ongoing buybacks can increase earnings per share (EPS) for companies (like Berkshire Hathaway) with steady or growing net income. Since mid-2018, Berkshire's outstanding share count has fallen by 12.6%, which has helped to increase EPS and made the company more fundamentally attractive to value-oriented investors.
With 325 billion in cash at the ready, look for Berkshire's chief to buy shares of his favorite stock at some point in 2025.
