Is Warren Buffett’s Large Cash Position a Warning Sign?
There are significant opportunities in small stocks as small-cap earnings season begins.
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The stock market is at a crucial juncture on the first trading day of November. All of the Magnificent Seven (MAGS) names have reported, except for Nvidia (NVDA) , and the focus shifts to earnings reports of small-caps (IWM) and secondary stocks.
Magnificent Seven earnings were a mixed bag, with Meta (META) and Microsoft (MSFT) disappointing investors while Alphabet (GOOGL) and Amazon (AMZN) outperformed. However, the indexes held up well with some rotational action offsetting the mixed action in big-cap technology.
Small-cap earnings will now take center stage, and the key question is whether they trigger rotational action that produces new leadership to offset mixed action in bigger names. The Magnificent Seven group looks toppy and expensive, and the bears are focused on the group to support their negative views.
Another argument the bears are advancing is that Berkshire Hathaway's (BRK.A) (BRK.B) record cash holdings of $358 billion indicate the market is too expensive and that there are no good values to be found. The problem with the argument is that it is unique to Berkshire Hathaway. The company is so large and has so much cash that there is no available investment that can move the needle for it. Only about 60 stocks are trading on U.S. exchanges that have a market capitalization of more than $200 billion. Is it any surprise that Warren Buffett is having a hard time finding a hidden gem to buy?
Luckily, most investors do not have the terrible problem of having too much cash. The average small investor has thousands of investment and trading opportunities that Warren Buffett does not. That is particularly important as we head into small-cap earnings season. There will be a new crop of names that deliver positive surprises and remain outstanding values.
If you want to find the next big winner, focus on the earnings reports scheduled for release over the next two weeks. There will also be some disasters, but if you are an active, aggressive trader, the volatility in small-cap earnings offers excellent opportunities.
The best-case scenario for the market is strong rotational action into speculative and small-cap stocks, while big-cap technology and AI names consolidate. I expect elevated volatility, but we also have strong positive seasonality over a two-month period.
Don’t be misled by the financial media that pretends the stock market consists of just a few mega-cap stocks that drive the indexes and are too expensive for Warren Buffett. There are plenty of opportunities and good values among smaller names.
At the time of publication, Rev Shark had no positions in any securities mentioned.
