Since becoming CEO at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 1965, Warren Buffett has delivered nearly 20% compound annual returns. In other words, a $100 investment in the conglomerate back then would be worth nearly $4.4 million at the start of this year.
Buffett's long track record of success is why investors eagerly await Berkshire Hathaway's Form 13F filing with the Securities and Exchange Commission (SEC), which shows which stocks the conglomerate bought and sold during the most recent quarter.
Berkshire Hathaway trimmed some of its position in Capital One (NYSE: COF) stock in the second quarter. It had purchased the stock early in 2023. The conglomerate sold 2,651,978 shares, or 21% of its total stake in the financial services company. Could this sale be a warning sign from Buffett and his team at Berkshire? Let's dive in and find out.
Berkshire Hathaway bought Capital One when markets were fearful
Stocks had a tough go of it in 2022, as the broader market sold off amid the Federal Reserve's aggressive interest rate-hiking cycle. As a result, stocks across the board were cheap as many investors braced for a possible recession.
Then, the regional banking crisis threw another curveball at the markets, which weighed on financial stocks and put further downward pressure on them. Around this time, Berkshire Hathaway added nearly $1 billion in shares of Capital One during that first quarter for an estimated $101.76 per share, according to Whale Wisdom.
At the time, the purchase likely signaled a couple of things. For one, Buffett and his team probably didn't think a recession was lurking around the corner, as many economists at the time did. Not only that, the stock was relatively cheap , trading at nearly a 10% discount to tangible book value. This is well below its historical average, where it has traded around a 17% premium to book value over the last decade.
Berkshire's Capital One sale could be due to this
Berkshire Hathaway has gone on a bit of a selling spree lately. In addition to reducing its Capital One position, the conglomerate sold off half of its Apple stock, eliminated Paramount and Snowflake , and trimmed some of its holdings in Chevron and Floor & Decor . It also sold off shares of Bank of America several days in a row in July, which doesn't show up in its Q2 filing.
Its sales have many people wondering if Buffett is sending a resounding warning on stocks . After all, the stock market is expensive on a valuation basis compared to historical averages.
For Capital One, the stock has recovered nicely over the past year. Since the start of last November, the stock has increased 38% and now trades at a 24% premium to its tangible book. That's slightly more expensive than where it has traded over the past 10 years. It's possible Buffett and his team wanted to take some chips off the table amid the run-up.
COF Price to Tangible Book Value data by YCharts.
One thing that could be a near-term headwind for Capital One is the declining strength of the consumer. Over the past several quarters, Capital One has seen the delinquencies on its credit card loans tick higher , leading to higher charge-offs. Its net charge-off rate on credit card loans has gone from 4.41% in the second quarter last year to 6% this year.
The financial services company also charged off $2.6 billion in loans during the quarter, roughly in line with last quarter and up from $2.2 billion last year. On top of that, Capital One recorded a provision for credit losses of $3.9 billion to account for potential future charge-offs.
Should investors be concerned?
Capital One faces near-term headwinds as questions about the sustainability of consumer spending linger, which could leave the stock vulnerable to volatility in the short term. The stock trades at a slightly higher valuation compared to its recent history, which may be why Berkshire sold some of its stake.
There are some positive takeaways, however. Capital One's 30-day delinquency rate fell to 4.17% from 4.5% in the first quarter. Delinquency rates can be a leading indicator for net charge-offs, and seeing this fall is a good sign. Rising charge-offs may be due more to consumer metrics returning to pre-pandemic levels, and the lack of a sudden spike in delinquencies suggests that consumers have held up well thus far.
Despite the near-term caution, I think the stock could be a long-term winner. Looking toward the future, one huge tailwind for Capital One would be if its merger with Discover Financial Services is approved. Earlier this year, the two companies agreed to a $35 billion merger, which would be one of the largest bank mergers in U.S. history if approved.
The merger would enable Capital One to create a closed-loop payment network, like American Express , to compete against Visa 's and Mastercard 's networks. For now, the merger is up in the air, and a decision is expected by the end of this year.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has positions in Apple and Chevron. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, Mastercard, and Visa. The Motley Fool recommends Discover Financial Services and 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 .
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