In his 2002 annual report, Berkshire Hathaway (NYSE:BRK.A) chairman Warren Buffett was clear regarding his concerns about valuation: "Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us." The date of his 2002 annual letter to shareholders was Feb. 21, 2003. On that day, the Nasdaq closed at 1,349 and the S&P 500 at 848.
As the stock market has continued to increase (since Feb. 2003, the Nasdaq and S&P 500 are up 35% and 49%, respectively), Buffett's concerns about valuation have undoubtedly intensified. Berkshire's most recent SEC filing demonstrates that he and his managers are acting on those concerns.
Every quarter, the company discloses its stock holdings (including those held by its insurance subsidiaries such as GEICO) to the SEC in its Form 13F. The latest filing was on Feb. 17, 2004 and disclosed holdings on Dec. 31, 2003.
As of Dec. 31, Berkshire and its subsidiaries held stakes in 30 companies with a total market value of $34.9 billion. As Buffett has often written in his annual reports, he believes strongly in a concentrated portfolio of stocks where the holdings are rigorously analyzed -- or, as he has characterized it, "putting all your eggs in one basket and watching that basket closely." Given his extraordinary track record, Foolish investors should be paying close attention to any changes in his portfolio.
Foolish vs. foolish
Berkshire Hathaway rarely sells stock. Buffett articulated his point of view about selling in his 1985 letter to shareholders: "We do not sell holdings just because they have appreciated or because we have held them for a long time. (Of Wall Street maxims, the most foolish may be 'you can't go broke taking a profit.')."
Buffett has repeatedly stated that he sells stocks for only one of two reasons: The market judges a business to be more valuable than the underlying facts indicate it is to him, or because he and his team require funds for "still more undervalued investments or ones [they] believe [they] understand better." Given that they are currently sitting on $27 billion in cash, the latter reason is not likely to apply today. Berkshire is selling stocks today because Buffett and his team believe that the current valuations are unsustainably high for those securities.
Since its last report listing equity positions held on Sept. 31, 2003, Berkshire has sold all of its holdings in four companies: Duke Energy (NYSE:DUK), Dun & Bradstreet (NYSE:DNB), Great Lakes Chemical (NYSE:GLK), and Level 3 Communications (NASDAQ:LVLT).
Investors who hold long positions in these companies today are essentially betting against Buffett -- a rather bold gamble. At a minimum, these investors should have sound analysis and logic to support holding on to their long positions in these stocks. There is no doubt that Buffett and his team did their homework before unwinding their positions.
In addition, Berkshire has reduced its positions in another eight companies: Automatic Data Processing (NYSE:ADP), Dover (NYSE:DOV), Gannett (NYSE:GCI), Gap (NYSE:GPS), H&R Block (NYSE:HRB), HCA (NYSE:HCA), Mueller Industries (NYSE:MLI), and Zenith National Insurance (NYSE:ZNT).
The only new holding to Berkshire's portfolio is a European-based company -- the ADR's of Cadbury Schweppes (NYSE:CSG). And the only increase to an existing holding is a tiny addition of less than 0.5% in Berkshire's relatively small (less than 1.5 million shares) holding in Comdisco, a company currently in liquidation.
When Buffett speaks...
In aggregate, Berkshire has sold off U.S. equities valued at approximately $430 million (using Dec. 31, 2003 share prices). While this represents only a small fraction of its $35 billion portfolio, it is important to keep in mind that most of that portfolio is comprised of what Buffett has termed "permanent" holdings for Berkshire. These are shares in companies such as Coca-Cola (NYSE:KO) and The Washington Post Co. (NYSE:WPO), many of which he has held for literally decades.
Buffett is clearly not finding many opportunities to invest the U.S. stock market today. Despite the fact that he has $27 billion of cash sitting idle, concerns about valuation are driving him to sell some stocks and increase that pile of cash. In doing so, he is sending a strong, clear message not only about the specific stocks he is selling, but also about the U.S. equity market in general. Individual investors should be listening closely.
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When he's not in the mountains hiking, biking, or skiing, Salim Haji writes about stocks from his home in Denver, Colo. He owns shares of Berkshire Hathaway. He can be reached via email. The Fool has a disclosure policy.
