News
Warren Buffett Is Selling Apple Stock and Buying Shiny Mega-Cap Stock Instead
Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), is responsible for “major investment decisions and all major capital allocation decisions” made by the company, according to financial filings with the Securities and Exchange Commission.
With that in mind, Berkshire sold 116 million shares of Litter (NASDAQ: AAPL) in the March quarter, reducing its stake by 13%. Apple still accounts for 40% of its $336 billion portfolio, but the company has already reduced the position in two consecutive quarters. Meanwhile, Buffett bought another mega-cap stock that he believes will outperform S&P 500 (SNPINDEX: ^GSPC) index.
Keep reading to find out more.
Apple: The Stocks Warren Buffett Was Selling
Apple benefits from brand authority and pricing power. Its ecosystem of compelling hardware, proprietary software, and integrated services creates a user experience people will pay more for. In fact, 80% of iPhones cost over $800, while only 22% of Samsung Smartphones (Android) are in the same range, according to the International Data Corporation (IDC).
Apple has a particularly strong presence in the smartphone market. The iPhone accounted for 20% of smartphone shipments by volume last year, up from 14% in 2019, according to IDC. But Apple also has a strong presence in the tablet, personal computer and smartwatch markets, among other consumer electronics verticals. In total, its installed base exceeds 2.2 billion active devices.
Apple monetizes its installed base with adjacent services. This includes fees for iCloud storage, App Store downloads, and subscription products like Apple TV+, as well as financial and advertising services like Apple Pay. Importantly, Apple’s biggest growth prospects lie in services, because services revenues are growing faster than hardware revenues and services earn higher margins than hardware.
Apple reported disappointing financial results for the second quarter of fiscal 2024 (ended March 30). Revenue fell 4% to $90.8 billion due to a 10% decline in iPhone sales, offset by a 14% increase in services sales. About that, GAAP net income fell 2% to $23.6 billion, although the company was able to increase earnings per share with share buybacks.
The problem with Apple is valuation. Wall Street expects earnings per share to grow 10.6% annually over the next three to five years. If that number is divided by its current price-to-earnings ratio of 33.1, the result is a high price-to-earnings-to-growth (PEG) ratio of 3.1. This is a significant premium to the three-year average of 2.4, which may explain why Buffett reduced his holding in Berkshire.
The story continues
Berkshire Hathaway: The Stocks Warren Buffett Was Buying
The mega-cap stocks that Buffett bought during the first quarter were none other than Berkshire Hathaway. Specifically, it spent $2.6 billion on share repurchases during the first quarter of 2024, based $9.2 billion in share repurchases in 2023. Buffett has repurchased Berkshire shares in every quarter since the fourth quarter of 2018, which totals 22 consecutive quarters.
This has consequences because the repurchase agreement stipulates that Buffett can only buy Berkshire shares when he “believes that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.” In other words, Buffett believes that stocks have consistently traded at a discount to their true value for several years.
Berkshire is an attractive investment for three reasons. First, his insurance subsidiaries generate money in the form of premiums, and Buffett has historically achieved good returns by investing that capital. Berkshire’s book value per share has increased 11.1% annually over the past decade, while the S&P 500 has returned 10.9% annually over the same period. Changes in book value per share are a good indicator of changes in intrinsic value, so the implication is that Berkshire has gained value faster than the S&P 500 over the past decade.
Second, Berkshire has dozens of subsidiaries that operate in a wide range of industries, including insurance, rail freight, energy, retail and utilities. Many of these wholly owned companies provide goods and services that are essential in any economic environment, such that Berkshire has historically outperformed the S&P 500 during bear markets, as shown in the chart below.
|
March 2000 |
(49%) |
(24%) |
|
October 2007 |
(57%) |
(54%) |
|
February 2020 |
(34%) |
(30%) |
|
January 2022 |
(25%) |
(27%) |
|
Average |
(41%) |
(34%) |
Data source: Yardeni Research, Ycharts.
Third, Warren Buffett has great confidence in Berkshire. “[W]With our current business combination, Berkshire should perform somewhat better than the average American company and, more importantly, should also operate with a materially lower risk of permanent loss of capital,” he wrote in his last letter to shareholders. The S&P 500 is synonymous with the US stock market and therefore a benchmark for the average American company. Therefore, Buffett claims that Berkshire should safely outperform the S&P 500 in the long term.
Should you invest $1,000 in Apple right now?
Before buying Apple stock, consider the following:
The Motley Fool Stock Advisor analyst team just identified what they believe is the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia I made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $794,196!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular analyst updates, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns June 10, 2024
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett Is Selling Apple Stock and Buying Shiny Mega-Cap Stock Instead was originally published by The Motley Fool