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Warren Buffett’s Billions and Berkshire Hathaway Stock Await Disaster

Where do you think the biggest pile of cash is in America today? Apple (NASDAQ:AAPL)? Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)? Maybe, Facebook (NASDAQ:FB)?

Nope, it’s at Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), the insurance conglomerate, where $128 billion sits around uninvested. America’s premier investor doesn’t see any bargains. This has analysts worried.

Back when Apple was rising, and analysts were trying vainly to justify their price targets, they talked about its value “ex-cash,” that is with the cash taken out of the market capitalization. For Berkshire Hathaway on Nov. 6 that figure is $406 billion, against $67.9 billion of earnings just for the first three quarters of 2019. That’s a price-to-earnings multiple of 6, cheaper than Ford (NYSE:F), and it’s not counting Christmas.

What does Warren Buffett see that no one else sees?

No Bargains

What he sees is there are no bargains out there.

By that he means there isn’t a company he can buy with free cash flow, measured against its market cap, that represents value.

The market, in short, is overbought. It’s headed for a fall.

Warren Buffett is nibbling. He’s nibbling on stocks like Amazon (NASDAQ:AMZN) and Apple, both of which specialize in free cash flow. Amazon CEO Jeff Bezos, in fact, always puts his cash flow statement above earnings when reporting corporate results. He’s Warren’s kind of fellow.

The peanut gallery, meanwhile, is filled with advice. One analyst suggests he buy Walgreens (NASDAQ:WBA). That might make a good fit with Haven, the managed care venture he launched with Amazon and JPMorgan Chase (NYSE:JPM). Trouble is, Walgreens had just $232 million of free cash flow in its most recent fiscal year, on a market cap of $52 billion.

Selling the overseas part of Walgreen’s business back to CEO Steffano Pessina sounds nice, but that was valued at $22 billion when the companies combined in 2014.

That’s not the kind of deal Buffett likes.

Trouble Ahead?

Buffett’s stock purchases are pored over like leaks from the Robert Mueller probe, but they shouldn’t be. Most of the company’s purchases today are made by people working for Berkshire’s various insurance companies.

Buffett is more interested in “elephants,” huge deals offering huge rewards. He’s like Mr. Potter in It’s a Wonderful Life. He waits for panic before he pounces, as with his 2011 deal with Bank of America (NYSE:BAC). There, $5 billion in 2011 warrants became $17 billion worth of common by 2017. Since then he’s been nibbling, and now has a stake worth $29 billion, 10% of the whole.

So, if Buffett’s building cash, some analysts feel it means the market is headed for a major correction. Insiders are selling, CEO confidence is ebbing, the United Nations is warning and global markets are heavily synchronized. It all spells trouble ahead.

I’ve been quietly “Buffetting” my own portfolio. About one-quarter of my retirement account is now in stocks or short-term bonds. Just half is sitting in common stocks. And my finger is on the sell button.

Bottom Line on BRK.B Stock

The best indication for me that a correction is approaching is the happy talk on TV.

The current price-to-earnings ratio for the S&P 500 is 22.9. The Shiller P/E, which adjusts for inflation, is over 30 — that’s about the level it was at in 1929, when the market crashed before the Great Depression. It has only been higher once, during the dot-com bubble.

It tells me that Warren Buffett knows something. He may be 88, he may not like tech stocks, but he knows something.

Keep your powder dry and your finger over the sell button.

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