Why This High-Yield Warren Buffett Stock Is Falling This Week

In the ever-changing landscape of the stock market, even the most seasoned investors like Warren Buffett can face unexpected challenges. This week, one of Buffett's high-yield stocks, citigroup, has seen a significant decline. Let's dive into the reasons behind this drop and what it means for income-focused investors.



The Recent Decline in Citigroup

Citigroup, a major player in the banking sector, has been a part of Berkshire Hathaway's portfolio for some time. However, in the fourth quarter of 2024, Berkshire sold 73% of its stake in Citigroup. This move was part of a broader trend where Berkshire sold more stocks than it purchased, signaling a view that the market is overvalued and lacking opportunities. The sale of Citigroup shares occurred at an average stock price of $67.32 throughout the quarter, implying close to 27% upside on the shares Berkshire sold. Assuming Berkshire owned these Citigroup shares for 2.75 years, that comes out to an average annual return of about 9.8%, which is in line with long-term annual returns of the broader market.

Broader Market Trends

The broader market trends have been characterized by high volatility and uncertainty. For instance, the S&P 500 index experienced significant declines in late 2023, and the market conditions were tumultuous. This volatility likely influenced Buffett's decision to sell his stake in Citigroup as part of a broader strategy to reduce risk in his portfolio during this uncertain period. Additionally, the broader market conditions have seen a significant increase in the forward price-to-earnings ratio for high-yield stocks, which may have been too high for Buffett's liking, given his value-oriented investment philosophy.

Shift in Investor Sentiment

Following the onset of the pandemic, Buffett began to sour on the banking sector, selling many of his large bank holdings. This trend continued in the fourth quarter of 2024, where Berkshire sold major chunks of its stake in Bank of America. This shift in sentiment towards bank stocks is reflected in the broader market trends, where investors have become more cautious about the banking sector due to regulatory changes and economic uncertainty.

Historical Performance and Current Valuation

To understand the current valuation of Citigroup, let's look at its historical performance. In the first quarter of 2022, berkshire hathaway purchased over 55.1 million shares of Citigroup at an average cost of about $53.40. At that time, Citigroup's tangible book value (TBV) per share was about $79, meaning Berkshire bought Citigroup for about 68% of its TBV. Banks often trade relative to their TBV, so a growing TBV can translate into a higher share price. Since Berkshire's purchase, Citigroup's TBV has grown about 13% to $89.34.

Now, let's consider the current valuation. Assuming Berkshire sold Citigroup shares at the average stock price throughout the fourth quarter of 2024, which was $67.32, this implies close to 27% upside on the shares Berkshire sold. Assuming Berkshire owned these Citigroup shares for 2.75 years, that comes out to an average annual return of about 9.8%, which is pretty in line with long-term annual returns of the broader market.

Comparison with Other Stocks in Buffett's Portfolio

Comparing this to other stocks in Buffett's portfolio, we see a different picture. For instance, Berkshire Hathaway sold a significant portion of its Apple shares in the second quarter of 2024, totaling 389,368,450 shares. This sale was part of a broader trend of selling more stock than buying for Berkshire Hathaway's equity portfolio in recent quarters. The factors contributing to Buffett's decision to sell Apple shares include performance issues, market conditions, and valuation concerns. Despite these sales, Berkshire Hathaway's remaining Apple stake is still worth more than $120 billion, indicating that Apple has been a highly profitable investment for Berkshire.

Another example is Bank of America, where Berkshire has been selling major chunks of its stake, a trend that continued in the fourth quarter of 2024. This suggests that Buffett may view the banking sector as overvalued or less attractive compared to other investment opportunities.

Long-Term Implications

Buffett's decision to hold onto a high-yield stock despite its recent decline has several potential long-term implications for Berkshire Hathaway's overall investment strategy. One example is the decision to hold onto Apple shares. Buffett sold a large chunk of his Apple shares in the second quarter of 2024, totaling 389,368,450 shares. This sale was part of a broader trend of selling more stock than he bought for Berkshire Hathaway's equity portfolio in recent quarters. The factors contributing to Buffett's decision to sell Apple shares include performance issues, market conditions, and valuation concerns. Despite these factors, Buffett still holds a significant stake in Apple, which is Berkshire Hathaway's largest public stock holding. As of the time of this writing, Berkshire's $69.9 billion remaining Apple stake is its largest public stock holding. The stock has appreciated significantly since Buffett first invested in it back in the first quarter of 2016, and even after the latest sale, Berkshire's Apple stake is still worth more than $120 billion. This decision to hold onto Apple shares despite its recent decline shows that Buffett believes in the long-term potential of the company and is willing to weather short-term volatility. This decision aligns with Berkshire Hathaway's overall investment strategy of buying great companies at discounted prices and then holding for the long term. As Buffett once noted, “the best time to sell is never.” This long-term perspective has allowed Berkshire Hathaway to generate cumulative returns of 5,502,284%, a nearly 20% annual return, compared to 39,054% returns for the S&P 500, or 10.4% a year.

Conclusion

In conclusion, the recent decline in Citigroup's stock price can be attributed to Berkshire's decision to sell a significant portion of its stake, the broader market trends of high volatility and uncertainty, and a shift in investor sentiment towards bank stocks. While the current valuation of Citigroup shows a significant increase in TBV and a respectable average annual return of about 9.8%, compared to other stocks in Buffett's portfolio, such as Apple, which has seen substantial gains despite recent sales, Citigroup's performance may not be as impressive. This could explain why Berkshire decided to sell a significant portion of its Citigroup stake. However, Buffett's long-term perspective and his decision to hold onto Apple shares despite its recent decline show that he believes in the long-term potential of the company and is willing to weather short-term volatility. This decision aligns with Berkshire Hathaway's overall investment strategy of buying great companies at discounted prices and then holding for the long term. As Buffett once noted, “the best time to sell is never.” This long-term perspective has allowed Berkshire Hathaway to generate cumulative returns of 5,502,284%, a nearly 20% annual return, compared to 39,054% returns for the S&P 500, or 10.4% a year.