Berkshire Hathaway (BRK.A +1.14%) (BRK.B +1.20%) and its chief executive officer, legendary investor Warren Buffett, continue to take a very cautious stance on the stock market. While the conglomerate did announce last month that it would acquire Occidental Petroleum's (OXY +2.51%) petrochemical unit, OxyChem, for $9.7 billion in cash, Buffett and company once again shunned buying stocks in the third quarter, with another quarter of net equity selling.
It was the twelfth straight quarter that Berkshire has sold more in stocks than it has bought. During the quarter, it bought $6.4 billion worth of stock, while selling $12.5 billion in equities. Buffett has aggressively trimmed some of his top positions in recent years, including in longtime holding Apple (AAPL 0.48%).
Equally notable is that Berkshire once again eschewed buying back its own stock, as well. It was the fifth consecutive quarter with no share repurchases, and came despite the stock seeing a meaningful dip from its highs in August.
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In the past, Buffett would only repurchase Berkshire shares when they were trading at 1.1 times book value or below, before later upping it to 1.2 times. However, he later stopped using price-to-book (P/B) altogether, believing it didn't always reflect the company's real intrinsic value. The stock currently sits around 1.5 times book value, which is down from the 1.8 times it traded at points earlier this year.
The lack of equity buying and stock repurchases, combined with strong third-quarter operating results, left Berkshire with a record $381.6 billion of cash on its balance sheet.
NYSE: BRK.B
Key Data Points
Strong Q3 results
Looking at Berkshire's Q3 results, the company's wholly owned operating businesses saw their after-tax operating profit climb 34% to $13.5 billion.
Berkshire's underwriting earnings soared from $750 million to $2.4 billion in the quarter, as it saw fewer claims. Because it is difficult to determine when claims may be filed, this can be a lumpy business, but Buffett likes the insurance business because of the float it produces, which is the money that insurance companies collect in premiums and hold until a claim is paid out. Historically, he has funneled this money into stock investments.
Berkshire's Burlington Northern Santa Fe railroad division saw its earnings rise nearly 5% to $1.45 billion, while its utility portfolio saw a nearly 9% decline in profit to $1.49 billion. Its manufacturing and retail businesses, meanwhile, saw an 8% increase in earnings to $3.62 billion.
Is it time to follow Buffett?
While Berkshire turned in a strong quarter, the biggest takeaway continues to be Buffett's reluctance to buy stock, including his own. Buffett is set to hand off his investing duties to Greg Abel next year, and he's not making any big splashes on the way out.
The Oracle of Omaha clearly sees the market as currently overvalued and is taking a very cautious approach. While he did find a nice deal with OxyChem, that will barely make a dent in Berkshire's cash portfolio. The good news is that Abel will have the cash to make any large investments he sees attractive, especially if there is a major market pullback.
As for Berkshire's stock, if Berkshire isn't buying back stock while sitting on a record pile of cash, I wouldn't be buying it either. Nobody knows Berkshire and what its intrinsic value is more than Buffett and his crew, so I'd wait for the company to start buying back shares before looking to put money to work in the name.
As for stocks in general, it's easy to see why Buffett may think the market is overheated and could pull back. That said, I don't think the average investor should try and time the market, as it is usually a failing strategy, and you need to not only time a downturn, but also get in before an upturn. That's tough to do.
Instead of trying to time the market, I recommend investors use a dollar-cost averaging strategy, where they invest a set amount each month regardless of where the market is trading. I think exchange-traded funds (ETFs) are a great way to implement this strategy, as you're getting a whole portfolio of stocks when you invest in one.
