Buffett Trims Apple Stocks, Doubles Down on Berkshire Hathaway

Warren Buffett, the legendary investor known as the “Oracle of Omaha,” has made a strategic shift in Berkshire Hathaway’s (BRK.A, BRK.B) portfolio, drawing attention from Wall Street. This move involves reducing Berkshire’s holdings in Apple (AAPL), a long-time favorite, while placing a renewed bet on Berkshire Hathaway itself. This article delves into the rationale behind these decisions and explores the implications for investors.
Apple: A Diamond with a Hefty Price Tag?
Apple has long been a cornerstone of Berkshire Hathaway’s holdings. The company’s iconic brand, loyal customer base, and innovative products have fueled its success. Apple’s “ecosystem” approach, seamlessly integrating hardware, software, and services, creates a user experience that commands premium pricing. For instance, a staggering 80% of iPhones surpass the $800 mark, dwarfing the high-end Android market share held by Samsung (according to the International Data Corporation or IDC).
Apple’s dominance extends beyond smartphones. It holds a strong presence in tablets, personal computers, and smartwatches, boasting an installed base exceeding 2.2 billion active devices. This vast user base translates to ongoing revenue streams through services like iCloud storage, App Store downloads, and subscriptions to Apple TV+. Additionally, advertising and financial services like Apple Pay are emerging growth areas.
However, a closer look reveals a potential chink in Apple’s armor – valuation. While Apple’s services segment is flourishing, recent financial results haven’t been stellar. Revenue dipped in the second quarter of fiscal year 2024, primarily due to a decline in iPhone sales. Even though stock buybacks helped maintain earnings per share growth, the overall picture might be concerning for value-conscious investors like Buffett.
The crux of the issue lies in Apple’s current price-to-earnings ratio (P/E) of 33.1. When compared to Wall Street’s projected earnings per share growth of 10.6% over the next few years, this translates to a hefty price/earnings-to-growth (PEG) ratio of 3.1. This is significantly higher than the historical three-year average of 2.4, potentially explaining Buffett’s decision to trim Berkshire’s Apple stake.
Buffett Bets on Berkshire Hathaway: A Vote of Confidence?
The intriguing aspect of Buffett’s strategy is the simultaneous repurchase of Berkshire Hathaway shares. Over the first quarter of 2024, Berkshire allocated a significant $2.6 billion towards buying back its own stock, adding to the $9.2 billion spent in 2023. This marks a 22-quarter streak of Berkshire Hathaway repurchases, a noteworthy trend.
The significance lies in the repurchase agreement, which stipulates that Berkshire can only buy back its stock when “the repurchase price is below Berkshire’s intrinsic value, conservatively determined.” In simpler terms, Buffett seems to believe that Berkshire’s stock has been consistently undervalued compared to its true potential.
This unwavering confidence in Berkshire Hathaway stems from several factors. Firstly, the company’s insurance subsidiaries are cash cows, generating a steady stream of capital that Buffett has historically deployed into lucrative investments. Over the past decade, Berkshire’s book value per share has risen by an impressive 11.1% annually, outperforming the S&P 500’s 10.9% return during the same period. Changes in book value per share often mirror changes in intrinsic value, suggesting that Berkshire has indeed been creating value at a faster pace than the broader market.
Secondly, Berkshire Hathaway boasts a diverse portfolio of wholly owned subsidiaries spanning industries like insurance, freight rail transportation, energy, retail, and utilities. These businesses cater to essential needs, making them resilient during economic downturns. This diversification is evident when comparing Berkshire Hathaway’s performance to the S&P 500 during past bear markets. For instance, while the S&P 500 experienced an average maximum decline of 41% during these periods, Berkshire Hathaway’s maximum decline was a comparatively modest 34%.
Finally, there’s the ever-present factor of Warren Buffett’s own conviction. In his recent shareholder letter, he expressed his belief that “with our present mix of businesses, Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital.” The S&P 500, being synonymous with the U.S. stock market, serves as a benchmark for “average” American corporations. Buffett’s statement, therefore, implies his confidence in Berkshire Hathaway’s ability to safely outperform the market over the long haul.
Considering Apple for Your Portfolio?
While Buffett’s decisions provide valuable insights, they shouldn’t dictate your investment strategy entirely. Apple remains a robust company with a loyal customer base and diverse revenue streams. However, its current valuation may warrant caution. As always, it’s essential to do your own research and consider your financial goals and risk tolerance before making any investment decisions.