Warren Buffett.
Gerald Miller | CNBC
An off-brand move to build up in Apple stock could have been Warren Buffett’s biggest trade.
Berkshire Hathaway’s stake in Apple, which has claimed 40% of its share portfolio, has increased a whopping $ 40 billion since the market bottom in March. The investment in the technology giant played a crucial role in helping the conglomerate to overcome the coronavirus crisis, as other pillars of its business, including insurance and energy, suffered a major blow.
Investing in such a high flyer apparently challenges Buffett’s well-known value investment principles. Berkshire bought its first 10 million shares of Apple in May 2016 through one of Buffett’s lieutenants. Over the span of four years, the “Oracle of Omaha” abandoned its habitual aversion to technology and increased its wager to 245 million shares, now worth more than $ 95 billion, to become Apple’s second largest shareholder, only behind Vanguard.
“If he had held on to his guns and only bought valuable stocks, that portfolio would not have worked as well,” Cathy Seifert, a Berkshire analyst at CFRA Research, told CNBC. “At the end of the day, shareholders will applaud this move.”
Apple shares rose more than 10% in the past month alone, bringing its 2020 earnings to more than 32%. The action got another boost on Wednesday when it won a landmark court case against the European Commission over a dispute over nearly $ 15 billion in Irish tax.
Outside of the Bershire stock portfolio, the company has a mix of businesses from rail giant BNSF to insurer Geico and Dairy Queen, which are less immune to the pandemic, to say the least.
“It handles a really big and very long reinsurance risk,” Seifert said, referring to the Berkshire insurance business. “There are some serious claims that have to be paid and I needed to keep the powder dry for that.”
Berkshire Class A shares gained more than 6% this month at $ 285,520 each as of Wednesday, reducing their 2020 losses to approximately 15%. The stock fell nearly 20% in the first quarter.
‘Third largest business’
Berkshire’s equity portfolio had focused on consumer and financial games before the conglomerate sank its feet into technology. Consequently, Buffett had missed the massive Big Tech race that fueled the latest bull market.
Now, the billionaire investor calls Apple Berkshire’s “third biggest business” for its interests in insurance and rail. Buffett previously said that the iPhone is a “sticky” product, which keeps people within the company’s ecosystem.
“It is probably the best business I know of in the world,” Buffett said in a CNBC interview in February. “I don’t think of Apple as a stock. I consider it our third business.”
Berkshire also owned 533,300 Amazon shares at the end of the first quarter, which are now worth more than $ 1.6 billion. One of Buffett’s deputies – Todd Combs or Ted Weschler – made the bet for the e-commerce giant in 2019.
The “Oracle of Omaha” raised its eyebrows a few months ago when it revealed that it had abandoned all of its $ 4 billion worth of air investments north due to the fundamental change in the industry caused by the coronavirus.
It was a rare move for the buy and hold investor to be criticized for taking a huge loss on this trade. Berkshire exited its stake in the airline before the massive rebound in shares when the economy partially reopened. United and American Airlines recovered more than 20% each month alone, while Delta Air Lines increased more than 10% in June.
However, the comeback has stalled lately and stocks are still a long way from their highs, in some cases more than half. Therefore, Buffett could still be right about airlines as investments.
And in reality, the loss of the airline’s trade pales compared to Apple’s big Berkshire return so far.
Challenge ahead?
“The challenge for Buffett is: are we in an episode of financial euphoria and will Apple be absorbed?” Bill Smead, chief investment officer at Smead Capital Management, told CNBC. Smead is a Berkshire shareholder.
Many on Wall Street have issued dire warnings about megacap tech companies, comparing their soaring valuations and their recent advance to the episode prior to the bursting of the tech bubble. Buffett avoided the collapse of dotcoms in the late 1990s and was criticized at the time for not joining in that shopping frenzy.
Apple is among the so-called FAANG block that pushed the Nasdaq Composite to a new record, marking the first US equity benchmark to eliminate losses from coronavirus. Apple shares are currently trading at approximately 30 times future earnings.
“Apple is not the most egregious part of this, but whether we like it or not, it’s twisted in the game,” said Smead. He believes Buffett is unlikely to sell his Apple stake anytime soon.
“He is a long-term holder and does not like to pay income tax,” said Smead.
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