Warren Buffett’s flagship firm Berkshire Hathaway B (NYSE:BRKb) reported its second quarter earnings on August 3rd, 2019. Earnings per share (EPS) came in lower than the expected 2.71, at 2.50. This makes the most recent report for the company a “miss” by 7.75%.
Despite this, revenues went up relative to 2018’s Q2 and thanks to the general market’s highly positive second quarter their stock portfolio performed quite well.
Everything considered, BRK’s earnings flew under the radar.
But truly, they should not have. Because hiding under the surface, Buffett’s hugely bearish sentiment was revealed by a mountain of cash.
Coming in at a record-breaking $122.4 billion, it’s the largest cash reserve ever maintained by Berkshire Hathaway (NYSE:BRKa).
This is something that really ought to have caught analysts off guard. In order to make money, Buffett needs to put that cash into capital. His company based in Omaha, Nebraska is an investment firm, after all.
What other purpose would the cash be used for?
During the past three-and-a-half years since acquiring Precision Castparts, Buffett hasn’t made any significant purchases.
Instead, they’ve been slowly hoarding dollars since then.
But investors didn’t see such all-time-high cash and cash equivalent numbers until the 2019 Q2 earnings report was announced, illustrating that there’s been considerable cutbacks on direct investments and acquisitions from Berkshire Hathaway.
Because over anything else, Buffett believes a serious equity crunch is on its way. Certainly something that could scatter bulls to the wind, but maybe not a full-blown recession.
During the course of his illustrious as perhaps the most successful investor in the world, Buffett’s empire was built by finding value where others could not.
Undoubtedly, being able to identify undervalued investments is the thing he does best.
And nowadays, his large cash reserves could be interpreted to mean that he doesn’t see value anywhere in the market.
We’ve talked about this here before – the idea that across the board, equities are undervalued. In spite of tech reckoning at the hands of the FTC and a lukewarm earnings season, investors continued to buy in Q1 and Q2 2019.
The needle couldn’t even be tipped by a $5 billion fine imposed against Facebook (NASDAQ:FB), one of the NASDAQ Composite biggest companies. In fact, Nasdaq stocks rose even higher.
That is, until the late July rate cut, which could possibly have returned equities down to a level that finally has Buffett ready to go long. Berkshire Hathaway was actually a net-seller of stocks during the first half of the year, meaning Buffett might have been selling in preparation for a damaging correction.
Which, as you’ve now noticed, has run the market ragged during the past week.
So, while Q2’s earnings demonstrated that the “Oracle (NYSE:ORCL) of Omaha” wasn’t buying the recovery hype, it does not translate to him being at the point of bailing on the market altogether.
Instead, it indicates that he’s just waiting for prices to fall before he makes his move. We’ll likely see Berkshire Hathaway leverage their cash reserves in a significant way once stocks fall into undervalued territory (however low that may be).
Of course, the company’s Q3 earnings report will tell the tale, and it wouldn’t be all that surprising if that’s what’s revealed by the financials – a strategy involving buying big after a rough patch.
Interest rate uncertainty along with trade war drama has equities enduring hard times. But in Buffett’s eyes, that’s something to be celebrated.
Because when everyone else has cashed out their chips, he’ll still be doubling down, and betting that the general market went overboard yet again. It’s been a winning play for him and his company for decades.
And for as long as he’s able to identify big-time value, there’s nothing to suggest that it won’t continue to achieve impressive gains going forward.