For the better part of six decades, Warren Buffett, the CEO of conglomerate Berkshire Hathaway(NYSE: BRK.A) (NYSE: BRK.B), has been running circles around the broader market. Since becoming CEO in the mid-1960s, he's overseen just shy of a 4,400,000% aggregate gain in his company's Class A shares (BRK.A). That compares to a total return, including dividends, of less than 30,000% over the same span for the benchmark S&P 500.
The Oracle of Omaha's overwhelming success as an investor has garnered him quite the audience. Specifically, they're eager to know what he and his investment team have been buying and selling.
Last week, money managers with at least $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission. A 13F provides an under-the-hood look at what Wall Street's brightest minds purchased and sold in the most recent quarter (in this case, the quarter ended Sept. 30).
Although Buffett and his investing lieutenants, Ted Weschler and Todd Combs, did a little bit of buying, it was Berkshire Hathaway's selling activity that really raised eyebrows. Warren Buffett and his team gave the official heave-ho to five brand-name stocks that had been continuous holdings in Berkshire's portfolio for more than a decade.
General Motors: Sold all 22 million shares
The most eye-popping sale of the September-ended quarter was auto stockGeneral Motors(NYSE: GM). GM, as General Motors is commonly known, had been a continuous holding for Berkshire Hathaway since the first quarter of 2012.
The most logical reason the Oracle of Omaha headed for the exit with GM is rising expenses, with the company facing something of a double whammy.
On one hand, it'll be contending with higher labor costs after signing a new agreement with the United Auto Workers. Though this ends six weeks' worth of strikes and standoffs, it likely caps General Motors' margin upside in the near-term.
Meanwhile, General Motors is also navigating a challenging macro environment, where average 60-month loan rates for a new car have effectively doubled in two years. It may become difficult for the average American to afford a new vehicle, based on the new norm for interest rates.
The final catalyst that may have tipped the scales for Buffett and his team of investors is a recent demand slowdown for electric vehicles (EVs). Though GM earmarked $35 billion for EV and battery investments through 2025, it's recently walked back production targets as EV demand has tapered.
United Parcel Service (UPS): Sold remaining 59,400 shares
A second longtime Berkshire Hathaway holding that the Oracle of Omaha and/or his top aides gave the heave-ho to is supply chain behemothUnited Parcel Service(NYSE: UPS), which you likely know better as UPS. The company behind the famous brown truck had been a continuous holding in Berkshire's portfolio since the first quarter of 2006.
Interestingly, Berkshire had held close to 1.4 million shares of UPS until the second quarter of 2012. When the curtain closed on 2012, the position had been reduced to the 59,400 shares that were carried until this past quarter.
The probable reason Buffett cashed in his proverbial chips may have to do with an uncertain near-term outlook for the U.S. economy. Although Buffett has said numerous times that he'd "never bet against America," he's a stickler for a good deal. Finding good deals is virtually impossible at the moment, with a key valuation indicator suggesting stocks are back in the danger zone.
Likewise, UPS recently forged a new labor agreement with the UPS Teamsters that'll see its expenses rise. While this isn't unexpected after historically high inflation in 2022, it could make things difficult for UPS to fully offset increased labor costs via higher shipping rates.
Ultimately, UPS no longer fit the mold of a prototypical Buffett stock with a sustainable or impenetrable moat.
Mondelez International: Sold remaining 578,000 shares
Another longtime holding that was given the boot during the third quarter is consumer staples stockMondelez International(NASDAQ: MDLZ). The company behind popular brands such as Oreo, Ritz, and CLIF Bar, had been a continuous holding for Berkshire Hathaway since the second quarter of 2007.
The catalyst that likely sparked Mondelez's exit from Buffett's portfolio is the recent pushback we've seen from consumers regarding higher prices. Though brand-name food and beverage companies enjoyed significant pricing power in 2022 when the U.S. inflation rate briefly topped 9%, we're beginning to see evidence from some of Mondelez's competitors of volume declines.
In other words, price hikes are doing most or all of the heavy lifting for consumer staples stocks. That's typically not a sustainable recipe for success.
Mondelez International's balance sheet may also have given the Oracle of Omaha and his team reason to pause. The company closed out September with around $20 billion in long- and short-term debt, compared to just $1.6 billion in cash and cash equivalents. Further, the $23.3 billion in goodwill Mondelez is carrying suggests a future (sizable) writedown is possible. Buffett's company was previously stung when core holding Kraft Heinz took a hefty goodwill writedown in February 2019.
But the nail in the coffin might be Mondelez International's valuation. Investors are paying about 20 times forward-year earnings right now for a company expected to grow its sales by less than 4% in 2024.
Procter & Gamble: Sold remaining 315,400 shares
Consumer staples stock Procter & Gamble(NYSE: PG), which is often referred to as P&G, was a fourth brand-name, longtime holding that was shown the door in the September-ended quarter. Prior to being sold, it had been a fixture in Berkshire Hathaway's portfolio since the first quarter of 2005.
Whereas Mondelez has used acquisitions to its advantage and grown its volume/mix, P&G hasn't been as lucky. The company's fiscal first-quarter results yielded 6% net sales growth, but a 1% drop in volume. Procter & Gamble is the perfect example of a company whose current growth is entirely dependent on passing along higher prices to consumers. But with the prevailing inflation rate declining since its peak in June 2022, consumers have begun trading down to cheaper store brands.
An off-the-radar issue that may have coerced Buffett and/or his team to sell P&G is the strengthening U.S. dollar. Since P&G reports its sales and profits in dollars, conversion of foreign currencies to dollars is expected to result in an up to $1 billion after-tax headwind for the company in fiscal 2024.
Currency movements are usually overlooked by long-term investors, since they have no impact on a company's ability to sell its goods and services or innovate. But with P&G trading for 22 times forward-year earnings yet delivering only low-to-mid-single-digit annual sales growth, these headwinds can't be ignored. If U.S. economic growth were to weaken, P&G simply doesn't offer the value fundamentally focused investors like Buffett would be seeking.
Johnson & Johnson: Sold remaining 327,100 shares
The fifth and final longtime holding that Warren Buffett completely sold during the third quarter is healthcare giantJohnson & Johnson(NYSE: JNJ), well-known as J&J. Prior to getting the boot, J&J had been a staple in Berkshire Hathaway's portfolio since the first quarter of 2006.
Though it would appear that Buffett and his team were intent on purging any brand-name company with an acronym, the more logical explanation for J&J being jettisoned has to do with the ongoing litigation it's facing and Buffett's willingness (or should I say unwillingness) to track catalysts for drug developers.
With regard to the former, Johnson & Johnson is facing approximately 100,000 lawsuits that allege its now-discontinued baby powder containing talc causes cancer. Though J&J hasn't admitted to any wrongdoing, it has attempted to resolve these claims on two separate occasions. Both attempts to settle were tossed in court. The financial uncertainty Johnson & Johnson faces from this litigation is clearly weighing on its stock.
Perhaps the bigger issue for J&J is that it's shifted its focus to brand-name drugs. Whereas Buffett understands the financial industry very well, he simply doesn't have the same passion for healthcare stocks. Neither he nor his core investment team appear to have much desire to review drug trials and experimental-drug pipelines.
But among the five stocks Buffett and his team sold during the third quarter, J&J offers the best value proposition. It's one of only two AAA-rated public companies, and it's historically inexpensive. My money would be on Buffett regretting the sale of J&J in a few years.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends General Motors, Johnson & Johnson, Kraft Heinz, and United Parcel Service and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.