As one of the world's most successful and prolific investors, it's no wonder Warren Buffett is closely watched by the stock market. After all, the "Oracle of Omaha" has been able to beat the S&P 500 37 out of the 45 years since he's founded Berkshire Hathaway (NYSE: BRK-B). Between 2000 and 2010 alone, the company returned a whopping 143%, compared with a mere 10.1% for the S&P 500. So when it's time for a company with this kind of reputation to disclose its latest holdings in a 13-F filing, as it does every quarter, everyone takes notice.
And this time, one trend was clear: Buffett was selling.
But this doesn't necessarily mean the stocks he sold are in trouble. Maybe Buffett doesn't see much more upside for these holdings, or maybe he is just reloading, with aims to land a "big game" acquisition as he has famously quipped in his annual letter to shareholders. After all, in the second quarter of this year, he sold nearly $3 billion in stocks and purchased only about $1.9 billion worth of new stock.
This means he was able to build his war chest to roughly $40.7 billion.
With all that cash in store, speculation continues to mount that he is on the lookout for a big acquisition. At the very least, his recent moves indicate he is waiting for a better entry point to move back into stocks in a big way.
But since no one knows for sure what this next big move will be, it's important to look at his three primary and largest sales to see what they say about the underlying companies. If you own any of these stocks, then it's useful to know Buffett's opinion of them.
1. Johnson & Johnson (NYSE: JNJ)
Health care giant and industry bellwether Johnson & Johnson has certainly seen better days. Buffett weighed in with his thoughts on J&J back in February on CNBC, stating that the firm had great products, a solid balance sheet, but had simply made "too many mistakes." This includes a number of costly and embarrassing product recalls, culminating in a $1.1 billion fine after a jury concluded the company misled doctors and patients about risks of taking Risperdal, an antipsychotic drug.
Investors used to able to count on J&J for consistent sales and profit growth. Just several years ago, it had a stellar reputation for steady 10% growth in sales and earnings. This track record has fallen by the wayside. During the past five years, annual sales are up only 4%, while profits are down by more than 1% annually in this period.
To lose Buffett's confidence is certainly an indication of how far the company's fortunes have fallen, and it may take some time for management to rebuild his and investors' trust.
During the quarter, he sold off nearly 64% of its J&J holdings -- 19 million shares worth close to $1.4 billion. This left him with only 10.3 million shares.
2. Procter & Gamble (NYSE: PG)
Also in the consumer space, this company is an industry leader in selling consumer and beauty products. P&G hasn't seen the product mishaps that J&J has experienced, but its growth is also failing to meet expectations. It also used to have a reputation for steady double-digit growth, but has only grown sales and profits at less than 2% and 4% each of the past five years.
Buffett's stake in P&G dates back to when he owned razor-blade giant Gillette, which P&G acquired back in 2005. He hasn't publicly stated his opinion on his investment, but the fact that he cut his holding by nearly 20% ($910 million) to 59.6 million shares (a current market value of $4 billion) clearly indicates he is more interested in freeing up capital for more compelling investment opportunities.
In July, Bill Ackman, another well-known value investor, took a multi-billion-dollar stake in P&G and has started to agitate for change. This could lead to a turnaround in the stock's performance down the road.
3. Kraft (NYSE: KFT)
Buffett has been unusually vocal in his dissatisfaction of Kraft in the past few years. Specifically, he voted against Kraft's purchase of European confectionary firm Cadbury back in 2010, arguing that Kraft was overpaying for Cadbury and giving up too much of its stock to make the purchase. He has been much more in favor of Kraft's decision to split itself into two separate firms: a slower growing North American grocery business and an international snack and candy firm exposed to fast-growing emerging markets.
Buffett has steadily sold his Kraft position off since the Cadbury merger. During the second quarter, he cut his existing stake another 25% to 58.8 million shares. This brought it down another $784 million and left a remaining market value of about $2.5 billion in his portfolio.
Risks to Consider: Berkshire Hathaway has a current market capitalization of $201 billion, which makes it one of the largest firms on the planet. Because of this, it's difficult to say for certain whether Buffett simply sold these positions for better opportunities down the road, needed the cash for corporate purchases such as making a big acquisition, or funding Berkshire's massive insurance operations.
Action to Take --> Buffett is widely considered the best stock picker of all time. As such, it may be worth considering selling the above stocks, or at least paring them in your portfolio. He still owns sizeable stakes in each firm, but he tends to keep selling down positions once he starts. Additionally, given the giant positions he holds, it can take months, even years, for him to sell a position completely off. For this reason, individual investors need to make their own conclusions on these three stocks and how each fits into their own portfolios.