- Warren Buffett's Berkshire Hathaway has increased stake in Apple, Inc. by 55%.
- The company reduced its stake in Walmart Stores, Suncor energy and Deere & Co.
- Why is the World's most popular value investor buying Apple and should investors follow?
Warren Buffett's Berkshire Hathaway Inc (NYSE:BRK.A) recently filed its latest 13F filing with the SEC, detailing the changes in its investments in publicly listed enterprises over the last quarter (April-June). Berkshire's equity positions in various public companies were worth $129.7 billion at the end of June, with the top 5 companies making up over 71% of the total portfolio.
The biggest changes in Berkshire's equity portfolio
The company raised its stake in Apple Inc. (NASDAQ:AAPL) by 55%, buying 5.4M shares through the quarter, in addition to the 9.8M shares it held as of the last update. The other major changes included a 27% reduction in the firm's Walmart (NYSE:WMT) stake, 26% reduction in the Suncor Energy (NYSE:SU) stake and a 5.7% reduction in the Deere & Co. position.
Berkshire Hathaway Holdings As Of June 30, 2016
Kraft Heinz continued to remain Warren Buffett's biggest holding making up 22% of the portfolio, followed by Wells Fargo, which accounted for 17.5% of the total portfolio. The Coca-Cola company, International business Machines and American express completed the top 5 holdings, which were worth $91.19B, making up the lion's share of the portfolio.
Why is Warren Buffett Investing In Apple?
The most interesting fact from the latest filing could well be the 55% jump in Berkshire's Apple stake. After having stayed away from tech companies for a really long time, the investments in IBM and Apple could indicate winds of change. In reference to Apple, Warren Buffett once said he would prefer to stay on the sidelines. Charlie Munger, the second-in-command at Berkshire, had previously gone on record saying:
The whole world admires the achievements of Apple. On the other hand, you could hardly think of another business that is more un-Berkshire-like than Apple.
Berkshire's move to rapidly scale into long positions in Apple stock is, therefore, in direct contrast to what Buffett and Munger believed, at least till a couple of years ago. So what exactly draws them to Apple stock now?
While it would be really difficult to boil down on the exact reasons for Apple now becoming an attractive investment to the fund managers at Berkshire Hathaway, we can make calculated conclusions based on the perspective of a value investor, which is Warren Buffett's dominant investment style. In context of Berkshire's investment in Apple, it would be worthwhile to look at one of Warren Buffett's famous investment quote:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
A closer look at the quote highlights two elements: Wonderful company and fair price. Credit Suisse published an interesting paper on Warren Buffett's assertion on wonderful companies a couple of years ago. They defined wonderful companies as companies with a high ROIC (Return On Invested Capital), as a high ROIC over an extended time period is a direct result of a competitive advantage or, in Buffett's words, 'economic moat'.
With a five-year average ROIC of 33.3%, Apple would easily be among the firms with the highest value for the metric. For reference, the average ROIC of S&P 100 firms over the last 10 years has ranged between 13% and 17.3%, with an average value of 15.8%. It would be fair to classify Apple Inc. as a wonderful company on this metric.
Coming to the second part of Mr. Buffett's advice of a 'Fair price', it would be interesting to look at Apple stock from a valuations perspective. Apple stock currently trades at a PE ratio of 12.6, lower than its 5 year average of 13.7. However, it would be worthwhile to look deeper into the stock than just its PE ratio.
A recent post on Amigobulls, by a fellow contributor, highlighted Apple's cash-to-assets ratio as a key metric for Warren Buffett's liking of Apple, Inc. Given the huge cash reserves which it currently holds, it would be worth looking at Apple's ex-cash valuation, which was extensively covered in a previous post on Amigobulls. With Apple stock trading at an ex-cash PE of close to 8, its massive cash position, and its high return profile, it is no surprise that value investors like Buffett are scaling into positions in Apple stock.
Warren Buffett's Berkshire Hathaway recently reported a 55% increase in its Apple Inc. stake. A deeper look into Apple Inc. fundamentals reveals that Apple qualifies as a 'wonderful company trading at a fair price.' It is no surprise that Warren Buffett is scaling into the stock. Given the ridiculously low valuations, by tech standards, Apple stock is trading at, it presents an attractive risk/return profile for value investors.