Buffett buys $345 million more of his preferred stock and sheds $7 billion of this key holding

Apparently, Warren Buffett sees something coming. Since mid-July, his company, Berkshire Hathaway (BRK.A -0.69%) (BRK.B -0.49%)gave up one of his biggest holdings, Bank of America (BAC -0.56%)offloading more than $7 billion worth of stock in just under two months. Why?

Buffett’s affinity for Bank of America appears to be waning

The megabank is a longtime favorite of Buffett’s and one of Berkshire’s biggest holdings; for years, it was second only to the back Apple. He first bought shares in 2007, just before the 2008 financial crisis.

You have! However, true to his philosophy, Buffett knew that Bank of America was a good company and would recover.

Although he sold about half his position after the crash, taking a roughly $100 million hit, he invested $5 billion directly in the company a few years later to help shore up the struggling bank. In return, Berkshire received preferred stock and mandates to buy 700 million shares at just over $7 at any time before 2021. Buffett saw that Bank of America was a solid profit-generating company and things would turn around.

And they did. He exercised the warrants six years later for a paper profit of $12 billion. Not a bad deal. Since then, he has been Bank of America’s largest shareholder and has been a net buyer of the stock — until now. Why?

We can’t know for sure, unfortunately, but here’s a plausible theory. Bank profits are cyclical and tend to outperform the market during boom times and underperform during downturns and recessions.

With the uncertain future of the US economy, troubling economic signals like the recent jobs report, consumer credit at record levels and the market showing “casino” qualities according to Buffett himself, Berkshire appears to be on the defensive, rapidly increasing its cash reserves . And Bank of America isn’t the only stock he’s selling.

Of course, it could be simple profit-taking. Buffett may expect capital gains taxes to rise soon. It could be a mixture of all of the above.

One thing is certain: there is one stock that Buffett consistently likes to buy, and still does, despite being a net seller of assets for some time.

Buffett believes in his company and its actions

It’s clearly a stock Buffett and company believe are their own. As of the latest quarterly report, he has bought back $345 million worth of Berkshire stock, bringing his total purchases through 2024 to nearly $3 billion. Since 2018, the company has repurchased nearly $80 billion of its own stock. That indicates a strong belief in his future. This is also how the company helps reward shareholders by increasing their stake in the company as the number of shares decreases.

Berkshire does not pay dividends. Instead, it helps increase the share price by buying back shares, even though it is not required to do so. It happens when Buffett believes the stock is trading below its intrinsic value.

So if he buys back Berkshire stock, he has the implicit blessing of one of the best investors in history. Under his leadership, Berkshire became the first US non-tech company to break the $1 trillion mark in market capitalization, though it has since fallen back below that level.

Berkshire has a diversified portfolio managed by one of the smartest teams in the business and has easily beaten the market year after year. I will say that it is currently trading above its average price to book value, but not enough to be too concerning. I still think it is likely to beat the market; apparently Buffett does too.