Last Saturday, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), Warren Buffett’s flagship firm, reported its second quarter earnings. Earnings per share (EPS) came in at 2.50, lower than the expected 2.71, making the company’s most recent report a “miss” by 7.75%.
Still, though, revenues grew relative to Q2 2018 and their stock portfolio performed quite well due to the general market’s highly positive second quarter.
By and large, BRK’s earnings flew under the radar.
But they really shouldn’t have. Because hidden beneath the surface, a mountain of cash revealed Buffett’s hugely bearish sentiment.
Clocking in at a record-breaking $122.4 billion, it’s the biggest cash reserve Berkshire Hathaway has ever maintained.
It’s something that should have caught analysts off guard. Buffett needs to put that cash into capital in order to make money. His Omaha, Nebraska-based company is an investment firm, after all.
What else would they use the cash for?
Over the last three-and-a-half years, Buffett hasn’t made a significant purchase since acquiring Precision Castparts.
Since then, they’ve slowly been hoarding dollars instead.
But it wasn’t until last Saturday’s earnings report that investors saw all-time-high cash and cash equivalent numbers, indicating that Berkshire Hathaway has dialed back their direct investments and acquisitions considerably.
Because more than anything else, Buffett thinks a severe equity crunch is on the horizon. Maybe not a full-blown recession, but something that would scatter bulls to the wind.
Over his illustrious career as arguably the world’s most successful investor, Buffett built his empire by finding value where others couldn’t.
Being able to identify undervalued investments is undoubtedly the one thing he does best.
And these days, his large cash reserves may indicate that he doesn’t see value anywhere in the market.
It’s something we’ve talked about here before – the idea that equities are overvalued across the board. Despite a lukewarm earnings season and tech reckoning at the hands of the FTC, investors just kept on buying in Q1 and Q2 2019.
Not even a $5 billion fine levied against one of the Nasdaq Composite’s biggest companies (Facebook) could tip the needle. Instead, Nasdaq stocks climbed even higher.
At least, until the late July rate cut, which may have brought equities back down to a level that has Buffett finally ready to go long. For the first half of the year, Berkshire Hathaway was actually a net-seller of stocks, meaning Buffett could have been selling in anticipation of a nasty correction.
Which, as you’ve seen by now, has run the market ragged over the last week.
So, while Q2’s earnings showed us that the “Oracle of Omaha” wasn’t buying the recovery hype, it doesn’t mean he’s ready to bail on the market altogether.
Rather, it suggests that he’s simply waiting for prices to drop before making his move. Once stocks fall into undervalued territory (however low that may be), we’ll likely see Berkshire Hathaway leverage their cash reserves in a major way.
The company’s Q3 earnings report will tell the tale, of course, and I wouldn’t at all be surprised if that’s what the financials end up revealing – a strategy that involves buying big after a rough patch.
Trade war drama, coupled with interest rate uncertainty, has equities enduring hard times. But to Buffett, that’s something to celebrate.
Because when everyone else is cashing in their chips, he’ll be doubling down, betting that the general market has gone overboard once again. It’s worked for him and his company for decades now.
And so long as he’s able to identify big-time value, there’s no reason why it won’t continue to generate impressive gains in the future.