Why these two companies could be the next big positions Berkshire Hathaway looks to sell.
Legendary investor Warren Buffett is known to take a long-term approach to investing. He’s held some stocks in his portfolio at Berkshire Hathaway (BRK.B 0.54%) for decades. Berkshire’s oldest position is in The Coca-Cola Company, which Buffett initially started buying in 1988.
However, the Oracle of Omaha has been in a selling mood lately. He recently cut the stake in his largest position, Apple, nearly in half. He has also been selling shares in what was previously his second-largest holding in Bank of America.
Why Buffett has been selling is unknown, but he’s raised a boatload of cash in the process. This could simply be a portfolio management decision, or possibly based on stock valuations. He also could be looking to make a big acquisition. While some have speculated that Buffett selling is a sign he is expecting an economic or market downturn, this would be a bit out of character for him, unless he also thought that valuations had just run way ahead of themselves.
That said, Buffett is clearly in a selling mood. Let’s look at two more stocks that could be on his list to sell.
Visa and Mastercard
Buffett clearly has a fondness for financial institutions involved in the credit card industry. After paring down his stake in Bank of America, his second-largest position is now in American Express, which is both a credit card processor and issuer. Buffett indicated in his shareholder letter last year that he plans to hold the stock indefinitely.
He also owns positions in credit card issuer Capital One, Citigroup, and, of course, Bank of America, as well as credit card processors Visa (V 2.17%) and Mastercard (MA 1.86%).
It’s these latter two stocks that are the next Buffett could look to sell. Let’s explore why.
1. Diversification
Berkshire already has a lot of exposure to the credit card industry. Amex made up more than 10% of Berkshire’s stock portfolio before the recent selling, while Visa was the conglomerate’s 14th largest holding and Mastercard its 16th largest holding. As mentioned above, it holds a number of positions in credit card issuers as well, including Bank of America, which is now its third-largest holding.
If Buffett was looking to reduce some exposure to consumer spending or add some diversification to Berkshire’s portfolio, exiting or reducing its positions in Visa and Mastercard would make sense. The stakes are sizable, but not big enough that selling would have a huge effect on their share prices.
Berkshire’s stakes in the companies also aren’t large enough to trigger any Form-4 filings showing that it was selling.
2. Legal uncertainties
Both Visa and Mastercard face legal uncertainties after a judge rejected a settlement between the companies and retailers related to an antitrust class action lawsuit over fees. The case revolved around the two credit card processors colluding with card-issuing banks to inflate interchange fees and preventing retailers from directing people to cheaper alternatives, such as debit card transactions, which carry much lower processing fees.
The initial settlement was largely viewed as a win for the two companies because it would put a temporary five-year cap on slightly reduced interchange fees. However, a judge ruled that the settlement did not treat large and small merchants equitably, with large retailers benefiting less. The reason for this is that large retailers already negotiate individual rates and pay less than posted rates, so rolling back the posted rates would not benefit them.
The judge also agreed with large merchants that the settlement did not address key anticompetitive practices such as the honor-all cards rule: If merchants accept one issuer’s Visa or Mastercard cards, they have to accept all Visa or Mastercard cards issued by any bank. In other words, if a retailer accepted a Visa credit card issued by Bank of America, it would automatically have to accept Visa cards issued by Citigroup and Capital One as well, even if they came with higher fees.
The courts can be unpredictable, but there is certainly some risk that Visa and Mastercard could be facing some headwinds from this case in the future.
Image source: Getty Images.
3. Potential consumer slowdown and high valuations
If Buffett is expecting a consumer slowdown, then perhaps no two companies are tied more to global consumer spending than Visa and Mastercard. The world has clearly shifted to card payments versus cash over the years, so if spending slows, it will clearly be felt by the two large credit card processors.
A consumer slowdown on its own likely wouldn’t be a reason for Buffett to sell given his long-term focus, but when combined with high valuations, it might compel him to take his profits. Visa currently has a forward price-to-earnings (P/E) ratio of more than 26, while Mastercard carries a forward P/E of 32. With revenue for the two companies growing between 10% and 11% last quarter, combined with the potential for a consumer slowdown and reduced fees from the class action lawsuit, those valuations are not exactly in the bargain bin.
V PE Ratio (Forward) data by YCharts.
While I don’t think Buffett would be selling either stock for just one of the reasons listed above, I think the combination of factors could put both on his chopping block in the near future.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
