Even Warren Buffett thinks his shares are too expensive

CNN
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Warren Buffett's Berkshire Hathaway has over $325 billion in cash on hand. But Buffett is in no hurry to spend the money on his own company's stock.

According to the Securities and Exchange Commission, Berkshire Hathaway (BRK.A) did not repurchase its own shares in the third quarter, ending a six-year streak of share buybacks Submissions.

Berkshire Hathaway was a net seller of stocks across its portfolio this quarter and increased its cash balance to record levels. Berkshire Hathaway's actions signal to investors that the stock may be overvalued, CFRA Research analyst Cathy Seifert told CNN.

According to Berkshire Hathaway's regulatory filings, Buffett will buy back shares if he believes the price is “below Berkshire's conservatively determined intrinsic value.”

In other words, Buffett will only buy back his own shares if he believes it's a bargain.

“The fact that Berkshire Hathaway didn't buy back shares would cause most people to ask, 'Well, if they don't buy back their shares, why should I?'” Seifert said.

Berkshire's Class A shares trade at about 1.6 times their book value (the implied value if Buffett liquidated everything, paid off the company's debt, and returned everything else to shareholders).

In the past, Berkshire Hathaway has said it would not buy its shares if they traded at more than 1.2 times book value. But the company abandoned this policy in 2018.

Berkshire Hathaway's Class A shares closed at $664,750 on Monday and are up about 21% year-to-date, narrowly outpacing the S&P 500's gain of about 20% over the same period.

“He made it very clear that they would never buy back shares if they thought the company was overvalued,” Robert Korajczyk, a professor of finance at Northwestern's Kellogg School of Management, told CNN.

In addition, Berkshire Hathaway's decision could also have an impact the general market environment, said Aswath Damodaran, a professor of finance at NYU Stern School of Business.

“It’s a signal that they are cautious about where the market is,” Damodaran said. “They have become cautious because they believe the market is overpriced.”

Berkshire Hathaway did not respond to a request for comment.

Russ Mold, an analyst at AJ Bell, said in a note that Berkshire Hathaway's lack of buybacks and continued cash holdings suggest Buffett is worried about the economy.

“All of this suggests that Buffett has serious concerns about the economic backdrop and the current state of the stock market,” Mold said in a note. “It implies a risk-averse mentality and the characteristics of an investor willing to wait for a better entry point.”

As Berkshire Hathaway continues to pile up cash – its cash holdings rose to $325.2 billion from $276.9 billion in June – it could signal to investors that Buffett doesn't think there are any stocks worth investing in that could be invested, says Korajczyk.

“If they don't have alternatives that are good buys at this point, it makes sense to go cash and wait for the market to correct and then make purchases,” Korajczyk said.