Is Warren Buffett Unconvinced of Stock Market Rally?

    Berkshire Hathaway is holding $128.2 billion in cash, according to its quarterly report. With no big deal in four years, Warren Buffett seems to be unfazed by the stock market rally.

    Buffett, who has evolved the $528 billion conglomerate into the world’s biggest financial company by revenue, is known to be patient in spotting large deals, primarily acquisitions, for Berkshire.

    However, with the company not engaging in a high-profile acquisition for nearly four years and losing a long-time investor as a result of it, analysts anticipate that Berkshire will soon use its resources to re-enter the stock market.

    Obscene Amount of Capital

    As reported by CCN, the S&P 500 reached its record high on Nov. 1 as a positive jobs report pushed investors to move out of the bond market to higher-risk options.

    Still, safe-haven assets like gold and high-yield bonds are in high demand from investors in both the U.S. market and overseas markets, indicating that investors remain cautious on the short-term trend of the stock market.

    Berkshire’s 14% increase in operating profit fueled by the strong performance of Kraft Heinz and its railroad business further expanding the company’s capital led to expectations of more investments by the firm’s fund.

    Yet, with no deals in sight, according to Bloomberg, Berkshire is on track to record the firm’s worst underperformance in 10 years.

    stock market
    Berkshire Hathaway has underperformed against S&P 500 and the U.S. stock market in 2019 (source; Yahoo Finance)

    Year-to-date, the S&P 500 has spiked by well over 22%. In the same period, Berkshire climbed by 5.7%, falling behind the stock market.

    The decision of the conglomerate to not spend its growing capital could stem from its anticipation of a pullback in the stock market, as it may consider the current value of stocks to be too high to enter.

    But, such a decision did not please some of its loyal investors. Last month, David Rolfe, Wedgewood Partners chief of investment, harshly criticized Berkshire and Buffett for their lack of investments and “thumb-sucking,” stating that the small number of investments the company made have struggled so far.

    “Recent billions in capital investments in notable mistakes such as IBM, Lubrizol, Precision Castparts and Kraft do not inspire confidence that Buffett & Co. are still at the top of their game,” noted Rolfe.

    Is Buffett losing his touch?

    Sharing the sentiment of Rolfe, Edward Jones analyst Jim Shanahan stated that Berkshire could have made use of its pile of cash in a better way when the market pulled back earlier this year.

    “Whenever this market pulls back meaningfully, they’ll have a lot of capacity to put cash to work,” said Shanahan.

    While the numbers of Berkshire remain positive due to the firm’s cash-generating businesses, analysts remain in doubt whether the firm’s holdout on large deals in this state of the stock market is the right decision.

    Buffett and Berkshire possibly see a deeper dip to occur in the stock market as the year’s end approaches, as investors like Peter Cecchini of Cantor Fitzgerald predict an 18% crash in the markets by early 2020.

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