Do Warren Buffett's Recent Moves Spell Doom for This Group of Stocks?

Warren Buffett is frequently called the “Oracle of Omaha.” An oracle, by definition, is something that provides wise counsel and often foretells the future. Buffett’s uncanny ability to pick stocks that beat the market over the long term seems to justify his nickname.

So when the Oracle of Omaha sells a specific group of stocks pretty much across the board, it raises eyebrows. And that’s just what he has done over the past several quarters. Do Buffett’s recent moves spell doom for pharma stocks?

Image source: The Motley Fool.

A farewell to pharma

Buffett’s buys for Berkshire Hathaway (BRK.A 1.49%) (BRK.B 1.34%) usually garner a lot more attention than his stock sales do. It’s not surprising, therefore, that there were few if any headlines trumpeting Berkshire’s complete exit from its position in Royalty Pharma (RPRX 0.00%) in the second quarter of 2022.

Berkshire first initiated a stake in Royalty Pharma in Q2 2021. It’s not unusual for Buffett and his investment managers to close out positions within a year or so. What makes the sale of Royalty Pharma stand out, though, is what happened previously.

In the first quarter of this year, Berkshire sold all of its remaining shares of two other pharma stocks — AbbVie (ABBV -0.80%) and Bristol Myers Squibb (BMY -0.48%). The giant conglomerate has been steadily trimming its positions in the two stocks in the quarters leading up to Q1.

There’s even more evidence that pharma stocks have fallen out of favor with Buffett, though. Berkshire has also owned shares of Pfizer (PFE -1.21%) and Merck (MRK -0.21%) over the past couple of years. But neither stock is in its portfolio now.

Sure, Berkshire still owns one big pharma stock. Johnson & Johnson (JNJ -0.33%) has been a holding for years. However, the stake in J&J is minuscule — only 327,100 shares. This represents a tiny sliver of Berkshire’s total portfolio. 

Does Buffett hate pharma stocks?

The obvious question that comes to mind is: Why has Buffett bailed on pharma stocks? Does he now hate the pharmaceutical industry?

We know that Buffett hasn’t completely soured on healthcare. Berkshire still owns over 36 million shares of dialysis provider Davita. More importantly, Berkshire added to its new position in healthcare services company McKesson in Q2. 

It’s not that all pharma stocks have been losers. Shares of Bristol Myers Squibb and Merck (two stocks that Berkshire once owned but later dumped) have soared close to 20% so far in 2022.

We can’t blame it on the potential impact of forthcoming Medicare drug price changes, either. Berkshire sold its stakes in pharma stocks (other than J&J) well before Congress passed the Inflation Reduction Act that included these Medicare changes.

Perhaps the best reason why Buffett has become disenchanted with pharma stocks is simply that he was never very enchanted with them in the first place. The pharmaceutical industry really isn’t in the legendary investor’s wheelhouse despite his several purchases of pharma stocks through the years.

Buffett could also want to build up Berkshire’s already sizable cash position to buy what he likes to call an “elephant.” This theory does have something in its favor: Berkshire won regulatory approval last week to buy up to 50% of Occidental Petroleum.

Premature doom and gloom

We can only speculate about Buffett’s motivations to sell pharma stocks. However, any general doom and gloom among investors about these stocks could be premature.

Yes, the new power for Medicare to negotiate the prices of the costliest prescription drugs could hurt some pharmaceutical companies. However, the changes will be phased in beginning in 2026. And they won’t impact all drugs.

Don’t underestimate the creativity and ingenuity of big pharma companies. If there’s a way to drive revenue and profits higher, they’ll probably find it. 

Buffett deserves to be called the Oracle of Omaha. But even oracles don’t always know what the future holds. Some of the pharma stocks that Berkshire has exited just might beat the market over the next decade.

Keith Speights has positions in AbbVie, Berkshire Hathaway (B shares), Bristol Myers Squibb, and Pfizer. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares), Bristol Myers Squibb, and Merck & Co. The Motley Fool recommends Johnson & Johnson and McKesson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Leave a Comment