Is Warren Buffett Repeating a Mistake by Selling These Stocks?

Okay, let me pay my respects right at the start. Warren Buffett is a personal hero of mine. I’ve fashioned many elements of my own life after Buffett’s, including investing.

This has radically changed and improved every aspect of my existence. However, Buffett is a human being.

And like any other human being, he can, and sometimes does, make mistakes. Indeed, he might have recently done just that. Not only that, it’s a mistake he might be actually repeating.

Today, I want to tell you why Warren Buffett might be making a huge mistake yet again by selling a certain group of stocks. Ready? Let’s dig in.

Buffett controls a $300 billion common stock portfolio within his conglomerate, Berkshire Hathaway.  While he does have two investing lieutenants to help him manage money – Todd Combs and Ted Weschler – Buffett is still the big boss who oversees everything.

While we can never say with certainty who is doing what within the portfolio, the buck ultimately stops with Buffett.

Moreover, no matter who’s doing the buying and selling, is still impacts Buffett and all other Berkshire Hathaway shareholders. So getting caught up in who’s doing what is missing the point. And the point here is, Buffett & Co. have recently been selling a particular group of stocks, which I think is a huge mistake.

I’m talking about Big Pharma.

That’s right. Berkshire Hathaway significantly reduced their exposure to pharmaceutical businesses throughout Q3 2021. They’re moving out of Big Pharma in a big way. We know this after seeing their most recently filed 13F.

So which pharma stocks did Berkshire Hathaway sell last quarter?

They sold slightly more than 6.1 million shares of AbbVie (ABBV), almost 4.3 million shares of Bristol-Myers Squibb (BMY), nearly 9.2 million shares of Merck & Co. (MRK), and over 1.5 million shares of Organon & Co. (OGN). The Merck and Organon positions were completely sold out of. The positions in AbbVie and Bristol-Myers Squibb were substantially reduced.

By Berkshire Hathaway standards, these sales are… odd.

I say that because Buffett is almost legendary with his holding period. He’s famously patient, willing to hold on to investments for decades. Well, Berkshire Hathaway initiated their positions in major pharma companies in Q3 2020. They then started to cut back on their exposure almost immediately. They spent Q1 and Q2 of this year selling AbbVie, Bristol-Myers Squibb, and Merck. They’ve now completely sold out of Merck, as well its spin-off Organon.

I’ve called this a mistake before. And now I’m saying that they’re repeating the mistake.

Yep. I noted Berkshire Hathaway’s move out of Big Pharma when I put out a video covering their stock sales for Q2 of this year. I called the moves out of Big Pharma a mistake then. And I think Berkshire Hathaway is repeating that same mistake, since they’re back at it again in Q3 and selling Big Pharma once more.

This isn’t the only time I’ve come out and stated they’re making a mistake by selling a group of stocks.

Nope. I actually put out a video back in February covering Berkshire Hathaway’s selling of bank stocks during Q4 2020. I tried to put those sales into context. You have a backdrop of a portfolio that was, arguably, too aggressive with bank holdings in the first place. And Buffett is likely more interested in cementing his legacy than taking any outsized risks at his age. Furthermore, there was even more uncertainty about the pandemic and its effects back then.

Still, I stated that I saw these banks stocks as long-term buys, not sells.

That’s right. For instance, Berkshire Hathaway reduced its holding in U.S. Bancorp (USB) during Q4 2020. And based on the age and size of the position, I can almost guarantee you it was Buffett behind this move. Well, I highlighted USB as an undervalued high-quality dividend growth stock in August of 2020, right around the same time Berkshire Hathaway was trying to sell. Since I put that video out, the stock is up nearly 60%!

Should we follow in the footsteps of an investing giant here?

I don’t think so. Not in this case. Look, I’ve aimed to emulate Buffett in so many ways throughout my life. And I consider him a personal hero of mine. One of my best memories is going to the Berkshire Hathaway annual meeting in 2015 for the 50th anniversary of Warren Buffett taking control of Berkshire Hathaway. Seeing Warren Buffett and Charlie Munger in person is something I’ll never forget. However, I don’t go through life with rose-tinted glasses on believing that a personal hero is infallible.

Once again, I see Berkshire Hathaway’s sells as buys.

As with the bank stocks a year ago, I see Big Pharma as a group to be worth buying, not selling. Some look more worth buying than others. But it’s very tough to call any of them outright sells here, based on quality and valuation.

I’ll give you a great example of what I mean.

I analyzed and valued AbbVie in late September, showing why I saw it as 15% undervalued at that time. Since that video came out during Q3, it could have come out precisely when Berkshire Hathaway was selling AbbVie. Shares were trading hands for a bit over $107/each at the time. Abbvie’s shares are now going for over $116/each. It’s moved up some, but my fair value estimate for the shares came out to a bit over $123/each, so there could be more upside here.

I’ll give you another example.

How about Merck? Berkshire Hathaway completely sold out of their Merck position last quarter. And maybe they did so when Merck popped on the molnupiravir news. I don’t know. What I do know is, at under $81/share, Merck looks like a fantastic deal to me. I analyzed and valued Merck in early September, when it was trading hands for about $77/share. It’s up a bit since then, now at over $80/share, but I see this as a high-quality dividend growth stock that looks undervalued. My fair value estimate in the video came out to $92.24/share.

If you’re a long-term dividend growth investor, it’s simple. I see Big Pharma as ripe for investment.

Many of these stocks, like AbbVie and Merck, offer a fantastic combination of quality, growth, value, and yield. And they’re all consistently increasing their dividends, year in and year out, like clockwork. There’s almost nothing to dislike here. With healthcare benefiting from secular growth, these companies are cash machines. I love Buffett, and I consider him to be the greatest investor of all time, but I think long-term dividend growth investors ought to consider doing the opposite of Buffett in the case of Big Pharma.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.