Even Warren Buffett thinks his stock is too expensive

Warren Buffett’s Berkshire Hathaway has over US$325 billion in cash on hand. But Buffett is in no rush to spend that on his own company’s stock.

Berkshire Hathaway (BRK.A) did not buy back any of its own shares in the third quarter, ending a six-year-long streak of stock buybacks, according to Securities and Exchange Commission filings.

Berkshire Hathaway was a net seller of stocks across its portfolio that quarter and grew its cash-on-hand to record amounts. Berkshire Hathaway’s actions signal to investors that its stock might be overvalued, Cathy Seifert, an analyst at CFRA Research, told CNN.

Buffett will repurchase shares when he thinks the price is “below Berkshire’s intrinsic value, conservatively determined,” according to Berkshire Hathaway’s regulatory filings.

In other words, Buffett will only buy back his own stock when he believes it is a bargain.

“That Berkshire Hathaway did not repurchase any shares would lead most people to say, ‘Well, if they’re not buying back their stock, why should I?’” Seifert said.

Berkshire’s Class A stock is trading at about 1.6 times its book value (the implied value if Buffett liquidated everything, paid off the company’s debts and gave everything else back to shareholders).

In the past, Berkshire Hathaway had said it would not buy its stock if it traded at more than 1.2 times book value. Yet the company ditched that policy in 2018.

Shares of Berkshire Hathaway’s Class A closed at US$664,750 on Monday and are up about 21 per cent year-to-date, just outpacing the S&P 500’s gain of about 20 per cent for the same period.

“He’s been very clear that they would never buy back shares if they thought that the firm was overvalued,” Robert Korajczyk, a professor of finance at Northwestern’s Kellogg School of Management, told CNN.

Additionally, Berkshire Hathaway’s decision could also reflect the overall market environment, according to Aswath Damodaran, a professor of finance at NYU Stern School of Business.

“It’s a signal that they feel cautious about where the market is,” Damodaran said. “They’ve become cautious because they think the market is richly priced.”

Berkshire Hathaway did not respond to a request for comment.

Russ Mould, an analyst at AJ Bell, said in a note that Berkshire Hathaway’s lack of buybacks and continued cash-pile implies Buffett is concerned about the economy.

“All this suggests that Buffett has serious concerns about the economic backdrop and the current state of the stock market,” Mould said in a note. “It implies a risk-off mentality and the hallmarks of an investor who is prepared to sit and wait for a better entry point.”

As Berkshire Hathaway continues to amass cash — its cash holdings increased to US$325.2 billion from US$276.9 billion in June — it might signal to investors that Buffett doesn’t think there are any worthy stocks to invest in, according to Korajczyk.

“If they don’t have alternatives that are good buys at this point, it makes sense to sit in cash and wait until the market corrects and then make purchases after that point,” Korajczyk said.