In the three months leading up to June 2020, Warren Buffett has made great strides. Some were deeply unusual.
For example, the notoriously long-term investor rarely sells his entire stake in a company. In fact, he once said he was holding on to his losing investments longer than average. This is why it was a surprise that Buffett sold 100% of his stake in a number of high profile investments.
The biggest group Buffett left was the airlines. 100% of the four airline shares he owned have now been fully wiped out. However, it was not just the airlines that were cut. He also sold his entire stake to the Canadian fast food giant Restaurant brands.
Unlike airlines, Restaurant Brands’ stock has performed fairly well this year. The stock rebounded sharply from its March lows. In fact, it has only fallen 13.8% since the start of the year. So, the fact that Buffett has sold indicates that he sees more issues and possibly another foreclosure ahead, which could impact the company’s finances in the long run.
Likewise, it also reduced its holdings, by double-digit percentages, in most banks. Banks have always been the preferred industry for value investors. Taking a step back from the financial giants, again, indicates more economic problems to come.
Action Barrick Gold
Perhaps the biggest red flag in the recent deposit was Warren Buffett’s bet on gold – or, to be precise, his investment of US $ 550 million (C $ 723 million) in Barrick Gold (TSX: ABX) (NYSE: OR).
In many ways, Barrick Gold meets Oracle’s criteria for a great investment. The company has a competitive advantage because of its size. It is the second largest miner in the world. It is also trading at a healthy valuation. The share price is 12 times the earnings per share and three times the book value.
Perhaps the most attractive aspect of the business is its dividends. Barrick’s dividend yield is only 1% at the moment, but the company retains the majority of the cash it gets from mining. This year the dividend-to-payout ratio was only 9.1%, meaning the dividend could be increased significantly without too much risk to the balance sheet.
Finally, the stock is correlated with the market price of gold. Gold is considered a safe haven investment that increases with volatility and inflation. Warren Buffett has been critical of gold as an investment for years. He called it an “unproductive asset”. So the fact that Buffett added this exposure now indicates that he is more concerned than ever with inflation and volatility.
At the end of the line
Warren Buffett’s astonishing withdrawal from the stock market and the recent gold bet are a red flag for investors. Both the economy and the stock market could face an imminent drop.
Fool contributor Vishesh Raisinghani owns shares of Barrick Gold. The Motley Fool recommends RESTAURANT BRANDS INTERNATIONAL INC.