Buffett Is Sticking to Cash, With One Exemption

Berkshire Hathaway reported record earnings as interest rates rise, and the Oracle of Omaha now doubles down on bond buying despite the Fitch downgrade.

Hitting New Records

Warren Buffet's Berkshire Hathaway posted earnings on Friday when the stock closed at a 16th-month high. The company saw earnings return to positive on improved investment income, largely thanks to its gargantuan stake in Apple. At 5.8%, Berkshire Hathaway's stake in the iPhone maker is valued at $175B and benefited from the 47% increase in Apple shares this year. The total portfolio growth helped Buffet's company to generate operating earnings of $10B, with $25.9B in investment gains.

Berkshire Hathaway ended the quarter with $147.4B in cash and equivalents, which is near a record high and a $16.8B increase from the prior quarter. What the company is doing with its war chest gained interest following a slowdown of share buybacks from $4.4B last quarter to just $1.4B in the last three months. Buffet was unmoved by Fitch's downgrading of US sovereign debt and is putting his cash in bonds, which pay a substantially higher interest rate than last year. He said, "There are some things people shouldn't worry about. This is one." He pointed to the dollar being the world's reserve currency, which allayed his concerns about things he disagreed with the federal government.

Still Betting on Tech

Despite Apple's less than stellar third-quarter earnings report, the Oracle of Omaha seems to remain confident in the company's future, sticking with 45.5% of the portfolio. This is despite Buffet's notoriety as staying away from tech, despite the sector's strong performance so far this year. It's also notable that his company took a 1.9% stake in Activision-Blizzard three weeks ago.

The large cash accumulation pointed to another interesting trend: Buffet seems concerned about high stock prices. Not only did Berkshire Hathaway buy less of its own stock, but it sold $8B more in stock than it bought. The resulting profits were squirrelled away in treasuries. The company appears to be responding to the incentives of higher rates as share prices have risen, setting up a scenario to take profit. The swing from stocks to bonds is a classic defensive play ahead of a recession. Where the company goes from here will depend on what it does with the nearly $150B piled up, waiting for when valuations become more attractive.

Blizzard Nears Triple Digits

The stock price of Activision Blizzard received a boost from Buffett’s stake, but prices have not yet reached triple digits while remaining further distant from the record high at $104.50. If the flag pattern seen ending at $71 pans out as expected, the measured-move target at $93.60 has already been achieved, increasing the chances of a pullback to $87. If $82.50 gives in following potential bearishness, the next expected support lies near $75.

Source: SpreadEx / Activision Blizzard

Key Takeaways

Berkshire Hathaway, led by Warren Buffet, reported record earnings driven by improved investment income and its stake in Apple. The company's cash reserves reached a near-record high of $147.4 billion, prompting Buffet to invest in bonds due to high-interest rates despite Fitch's downgrade of US sovereign debt. Despite his aversion to tech stocks, Buffet remains confident in Apple's future and maintains a 45.5% stake in the company. Berkshire Hathaway's cautious approach is evident in reduced share buybacks and selling more stock than buying, signalling concerns about high stock prices and a defensive play ahead of a potential recession. With nearly $150 billion in cash, the company is waiting for more attractive valuations before deciding how to utilise its substantial reserves but did invest in Activision Blizzard a few weeks ago.