What Have We Learned From Berkshire Hathaway's Latest Holdings?

■ Buffett is buying Treasuries regardless of US downgrade by Fitch

Berkshire Hathaway reported its cash pile reached $147 billion while operating profits jumped 7% year-on-year to $10 billion in the second quarter. More than $120bn of that sum is invested in short-term Treasury bills.

After Fitch cut the US's sovereign rating to AA+ from AAA last week, Buffett told CNBC,“Berkshire bought $10 billion in US Treasuries last Monday. We bought $10 billion in Treasuries this Monday. And the only question for next Monday is whether we will buy $10 billion in 3-month or 6-month” T-bills.

■ Does this mean Buffett remains concerned about the stock market's rally?

It's a core tenant of Warren Buffett's investment philosophy to buy good companies at good valuations and let their managements work to build long-term gains. However, the increase of the cash pile is a sign that Buffett may still think the best time to invest is yet to come, and his conglomerate is struggling to find bargains in acquisitions or the stock market amid high valuations.

One way Berkshire has addressed this is by more aggressively pursuing stock buybacks, which it did to the tune of $1.4 billion in the second quarter and over $4 billion in the previous quarter. But with Berkshire's share price rising, that strategy—which Buffett once shunned—has grown less attractive.

Jim Shanahan, an analyst at Edward Jones, told Financial Times that “It is setting up for continued caution in the second half so long as some of this evidence of an economic slowdown and the impact of higher rates persists.” He said, “So long as stock prices of public companies and Berkshire’s own share price remain elevated, there won't be a whole lot of investment activity.”

■ Berkshire Hathaway's Q2 Holdings

The Berkshire Hathaway equity portfolio is still a diverse set of blue chips. The value of Berkshire's investments in equity securities increased by $38.6 billion, or 12% to $353.4 billion. Apple was the big winner.

■ Berkshire Hathaway's shares underperformed the S&P500

After the 15% outperformance to the S&P500 in 2022, Berkshire Hathaway's performance lagged behind the market index from this year, although BRK reported a positive growth of investment earnings in 2ndquarter.

The strength in Apple contributed to the BRK's investment earnings, as the majority of the market's gains this year have come from the rebound in big tech. Amazingly, around 90% of the S&P500's increase comes from the seven largest companies: Amazon, Apple, Meta, Microsoft, Nvidia, Tesla, and Alphabet.

However, viewed through this lens, Berkshire's performance, ex-Apple, has been on par with the bottom 493 companies in the S&P500. Since Buffett's investment sectors are mainly concentrated in areas that are greatly affected by the macro environment, such as the oil industry and the banking industry, the weakness of these sectors this year has dragged down BRK's investment income.

■ Utility sector profit falls short of expectations

The BNSF railroad, with more than 32,000 miles of track that run from Oakland, California to Chicago, showed a 12% drop in revenues. Profits fell by nearly a quarter to $1.3bn, and it reported less demand for freight shipping.

Berkshire's truck stop operator Pilot, which it took a controlling interest in this year, sold less fuel than a year earlier — when many companies still faced supply chain issues — and at lower prices, hitting revenues by 32%.

■ Berkshire Hathaway still hasn't recovered from the banking pain

After the Silicon Valley Bank incident, shares of Bank of America took a hit, falling 14.65% during the first quarter. The stock is still the second largest holding in Berkshire’s portfolio.

Even though the U.S. banking industry, including BofA's revenue and profits, are generally higher than expected in the second quarter, the stock price has not risen significantly.

Compared with other banks, Bank of America's performance is not the most outstanding. Its rival JPMorgan reported a sharp rise in net interest income, with second-quarter profit surging 67%. In contrast, due to the slowdown in the growth of loans and deposits, the growth of Bank of America's net interest income has also slowed down simultaneously.

Besides, Bank of America is currently facing pressure on its commercial real estate loan business, especially its office building loan portfolio. Rising financing costs and the prevalence of telecommuting have caused heavy losses to US office building owners. Against this unfavorable backdrop, BofA's provision for credit losses increased by $602 million to $1.1 billion in the quarter.