Warren Buffett’s Berkshire Hathaway sold its entire position in the Vanguard S&P 500 ETF in the fourth quarter. The company also sold the only other index fund it held, another S&P 500 index fund. These funds track the S&P 500, which is seen as the best gauge for the overall U.S. stock market.
Some might view this decision as a loss of confidence in the U.S. economy and domestic stocks. However, that seems unlikely given Buffett’s historic advice favoring such index funds for most investors. The S&P 500 index funds accounted for less than 0.02% of Berkshire’s portfolio in the third quarter.
Buffett might have sold these funds to consolidate minimal positions into a larger cash reserve in preparation for a potential stock market correction. This move is not an indication that Buffett believes the S&P 500 is currently cheap. The index has a price-to-earnings ratio of 26.1 times, which is higher than its 10-year average of 22.1 times.
Selling these funds is likely not a signal for individual investors to follow suit. While a correction could happen, the S&P 500 is still expected to return approximately 10% annually over the long term, consistent with historical performance.
Buffett’s strategic portfolio adjustments
Berkshire Hathaway also added to its stake in Domino’s Pizza, a dividend stock that has returned 7,120% since January 2010. Domino’s operates in the fiercely competitive quick-service restaurant space but stands as the largest pizza company globally due to its value proposition and technological innovations. Domino’s aims to bolster its leadership through a “hungry for more” strategy, targeting increases in sales, store count, and profits via menu innovation and marketing efforts.
By 2028, the company plans to add 1,100 stores per year while aiming for annual sales and operating income growth of 7% and 8%, respectively. Wall Street expects Domino’s earnings to grow at 9% annually through 2028. The company’s plan to grow operating income at 8% annually, coupled with consistent stock repurchases, suggests potential for faster earnings growth than analysts anticipate.
This makes its current valuation of 29 times earnings more reasonable. Domino’s quarterly dividend has increased by 17% annually over the past five years, including a 15% hike to $1.74 per share in the fourth quarter, making it a compelling long-term investment idea. Investors might consider starting with a small position and adding more shares when the price dips.
While Warren Buffett’s decision to sell the Vanguard S&P 500 ETF does not indicate a lack of confidence in the U.S. economy, his purchase of additional shares in Domino’s Pizza showcases his belief in the company’s long-term growth potential. Investors should analyze these moves within the broader context of their own investment strategies.
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