Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)bears responsibility for “major investment decisions and all significant 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 Apple (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 now reduced this position in two consecutive quarters. Meanwhile, Buffett bought another mega-cap stock that he thinks will outperform U.S. stocks S&P500 (SNPINDEX: ^GSPC) Table of contents.
Read on for more information.
Apple: The shares that Warren Buffett sold
Apple benefits from brand authority and pricing power. The ecosystem of attractive hardware, proprietary software and integrated services creates a user experience that people will pay a premium for. 80% of iPhones are priced above $800, while only 22% of them Samsung (Android) smartphones are in the same range according to the International Data Corporation (IDC).
Apple has a particularly strong presence in the smartphone market. According to IDC, the iPhone accounted for 20% of smartphone shipments by volume last year, up from 14% in 2019. But Apple also has a strong presence in the tablet, personal computer and smartwatch markets, among other consumer electronics verticals. In total, the installed base includes more than 2.2 billion active devices.
Apple monetizes its installed base with adjacent services. That includes charges for iCloud storage, App Store downloads and subscription products like Apple TV+, as well as advertising and financial services like Apple Pay. Importantly, Apple’s biggest growth prospects are in the services sector, as services revenue is growing faster than hardware revenue, and services deliver higher margins than hardware.
Apple reported disappointing financial results in the second quarter of fiscal 2024 (ending 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. Meanwhile, GAAP net income fell 2% to $23.6 billion, although the company managed to grow earnings per share through share buybacks.
The problem with Apple is the 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 the current price-to-earnings ratio of 33.1, the result is a high price-to-earnings-growth ratio (PEG) of 3.1. That’s a significant premium to the three-year average of 2.4, which could explain why Buffett has downgraded Berkshire’s stock.
Berkshire Hathaway: The stock that Warren Buffett bought
The mega-cap stock that Buffett bought in the first quarter was none other than Berkshire Hathaway. Specifically, he spent $2.6 billion on share repurchases in the first quarter of 2024, building on $9.2 billion in stock buybacks in 2023. Buffett has now repurchased Berkshire shares every quarter since the fourth quarter of 2018, which amounts to for 22 quarters in a row.
That makes sense because the repurchase agreement stipulates that Buffett can only purchase Berkshire shares if he “believes the repurchase price is below Berkshire’s intrinsic value, determined conservatively.” In other words, Buffett believes the stock has consistently traded at a discount to its true value for years.
Berkshire is an attractive investment for three reasons. First, the insurance subsidiaries generate cash in the form of premiums, and Buffett has historically earned good returns investing that capital. Berkshire’s book value per share rose 11.1% annually over the past decade, while the S&P 500 returned 10.9% annually over the same period. Changes in book value per share are a good measure 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 owns 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 climate, so Berkshire has historically outperformed the S&P 500 during bear markets, as shown in the chart below.
|
Bear market start date |
S&P 500 maximum decline |
Berkshire Hathaway max decline |
|---|---|---|
|
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 mix of companies, Berkshire should doing slightly better than the average American company and, more importantly, should also operate with significantly less risk of permanent capital loss,” he wrote in his latest shareholder letter. The S&P 500 is synonymous with the US stock market and therefore a benchmark for the average US company. So Buffett says Berkshire should be safe from outperforming the S&P 500 in the longer term.
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Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett is selling Apple stock and buying these brilliant Mega-Cap stocks instead. Originally published by The Motley Fool
