Warren Buffett’s famous for his stock-picking prowess, so when he decides it’s time to sell a stock in Berkshire Hathaway’s (NYSE: BRK-B) (NYSE: BRK-A) portfolio, it’s probably worth paying attention. Fortunately, a big investor like Buffett has to file a quarterly 13F report with the SEC showing exactly what he’s been selling, and his latest filing shows he’s unloading shares of IBM (NYSE: IBM) and General Motors (NYSE: GM). Should you give up on these blue chip stocks, too?
Lost patience with legacy
IBM is hoping to return to growth with its strategic-imperatives businesses, which sell solutions for high-growth markets including cloud computing. Unfortunately, the headway it’s making in these areas has struggled to offset declining demand for its legacy products and services and that’s landed IBM in Buffett’s cross-hairs.
Despite double-digit growth in its strategic-imperatives sales in 2017, IBM’s companywide revenue still fell 1% to $79.1 billion and its adjusted earnings declined to $13.80 per share from $13.59 in 2016 and $14.92 in 2015.
IBM’s inability to more quickly offset revenue and profit headwinds caused Buffett to begin selling shares early last year. In Q1 2017 he sold 17 million shares of IBM, leaving him with 64.5 million shares remaining on March 31, 2017. Since then, he’s continued to sell shares and according to his recent 13F report, Berkshire Hathaway finished December owning just 2.05 million shares of Big Blue.
The bad news is that IBM faces significant competition, including in its strategic imperatives business, where it’s battling Amazon.com’s Amazon Web Services, Alphabet, Microsoft, and others. The good news, is that IBM’s strategic imperatives business now represents 46% of sales, so if it can continue growing by double digits, then IBM could post its first full-year revenue growth in years in 2018.
But that growth may not provide a lot of pop to IBM’s profitability. IBM’s earnings forecast is for $13.80 this year and that only matches 2017’s performance. Therefore, until IBM proves to investors that it can reward them with significant top-line and bottom-line growth, it’s hard to argue that it’s the best blue-chip stock to own.
Cashing out of cars
Buffett could be getting a bit nervous about the U.S. auto market. He’s owned General Motors shares since 2012, but in Q4 the Oracle of Omaha reduced his stake in General Motors by 16.7%, or 10 million shares. If history’s any gauge, he probably plans to sell more of his remaining 50 million shares in 2018.
Buffett hasn’t said much publicly about his decision to sell GM shares, but, reading the tea leaves, it wouldn’t surprise me if he’s becoming less enthusiastic because U.S. auto sales posted their first post-recession year-over-year decline last year. As a result, GM’s North American adjusted operating profit slipped to $11.9 billion from $12.4 billion in 2016.
It may also concern him that GM’s profitability is increasingly reliant on its finance division, something that could become a problem if defaults increase because U.S. auto debt has swelled in the past few years. Or perhaps he’s simply booking his profit. After all, General Motors’ shares were trading at post-recession highs last October.
It could also be that Buffett’s starting to view General Motors as a technology company. Historically, Buffett’s avoided owning technology stocks because he doesn’t understand them well enough. Undeniably, trucks and cars are becoming rolling computers and competitors, including Tesla, are forcing GM to spend more money on technology initiatives, including autonomous driving. Buffett may feel like he doesn’t understand GM’s future as clearly as he did before. Another disincentive to owning GM stock is that there’s supply chain uncertainty associated with President Donald Trump’s desire to renegotiate NAFTA, which could impact vehicle imports from Mexico.
Only Buffett knows what he plans on doing with his remaining General Motors stock, but his selling is reminiscent of when he began selling some of his other former blue chip holdings, including Walmart and General Electric. If I’m right and this is the start of him unwinding his entire stake, then General Motors’s shares will probably remain risky to own, at least until he’s finished selling.
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