On May 4, Berkshire Hathaway (BRK.A -0.01%) (BRK.B -0.09%) released its first-quarter report and hosted its annual meeting of shareholders. While plenty of news came out of the report and the event, the part that stood out was undoubtedly the noticeable decrease in Berkshire's Apple (AAPL -0.75%) position.
Apple stock remains Berkshire's largest holding. But the sell-off might make some investors wonder if Berkshire is getting bearish on the tech stock. Here's some context on its Apple holdings, some justification for the sale, and how to approach the iPhone maker now.
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Context on Berkshire's Apple stake
The value of Berkshire Hathaway's Apple stake was estimated at $135.4 billion as of March 31, compared to $174.3 billion on Dec. 31, 2023. Based on a closing price of $171.48 on March 31 and $192.28 on Dec. 31, we can estimate that Berkshire held around 789,596,454 shares of Apple stock on March 31 compared to 906,490,534 shares on Dec. 31 -- implying a 12.9% decrease in the position between the fourth quarter of 2023 and the first quarter of 2024.
What stands out the most about this particular sale is its size. The largest previous reduction was when Berkshire sold about 93.5 million Apple shares in 2020. This sale is noticeably larger than the 10 million or so shares trimmed between the third quarter and the fourth quarter, which was about a 1% cut.
During the annual meeting, Buffett continued to praise Apple and even called it a better business than Coca-Cola (KO 0.14%) and American Express (AXP -1.23%) -- which have been Berkshire holdings for over 30 years.
But he also indicated that he preferred raising cash in this environment: "Unless something dramatic happens that really changes capital allocation and strategy, we will have Apple as our largest investment. But I don't mind at all, under current conditions, building the cash position. I think when I look at the alternatives of what's available in equity markets, and I look at the composition of what's going on in the world, we find it quite attractive."
Buffett said he would hold a lot of cash even if interest rates were lower. Another reason for the sale was to take advantage of lower federal tax rates on corporate capital gains, which Buffett fears might increase if the government's fiscal policy changes.
He seems to be battening down the hatches and taking a defensive approach to his current market outlook. Berkshire's cash, cash equivalents, and short-term investments in U.S. Treasury bills ballooned to $182.3 billion, up from $163.3 billion as of Dec. 31, 2023.
The decision to hold cash and a lack of noticeable buys this quarter -- besides the usual repurchase of Berkshire stock -- indicates that the company might view a lot of opportunities as unattractive on a risk/reward basis, especially when compared to holding cash or just repurchasing its own shares.
Interestingly enough, Apple has a sizable cash position of its own. Its trove of $162.3 billion in cash, cash equivalents, and market securities is nearly as much as Berkshire's cash position.
Buffett has a unique buying style
Buffett has a reputation as a high-conviction investor who is perfectly content with doing nothing for an extended period and then pouncing on a juicy opportunity. In fact, the creation of almost every major Berkshire holding wasn't the result of gradual purchases but rather large blocks in a relatively short time.
Berkshire purchased most of its Coca-Cola stock in the late 1980s and early 1990s. The American Express investment was completed in 1995. According to Stockcircle, which tracks stock purchases of major firms, Berkshire bought 1.01 billion shares of Apple between 2016 and 2018 at a split-adjusted price ranging from just $22.58 a share to $57.09 per share. Apple is worth more than three times the high end of that range today, which makes for a massive gain for Berkshire.
Herein lies the most important point of Berkshire's Apple holding: The only reason the position is so large is because the stock is up so much from when Berkshire began buying it, and its cost basis is so low. If Apple hadn't had that kind of performance over the last few years, it would be closer to the weight of other top holdings like American Express -- which makes up just shy of 10% of the public equity portfolio.
Despite Apple drastically underperforming the S&P 500 and the rest of the tech sector over the last year, the stock is still up big for Berkshire, so it was an easy choice to sell to raise cash.
Apple isn't as cheap as it used to be, but it's still a buy
Buffett's commentary in the last few shareholder meetings and annual shareholder letters suggests he still has immense faith in Apple. Berkshire's big bet on the company has the largest payoff -- probably more than Buffett and his team expected in a relatively short period of time.
Trimming Apple makes sense, given this context and Buffett's cautious outlook on the market, and I could see Berkshire continuing to trim the position from here. After all, it still owns a boatload of Apple -- over 5% of the company, in fact.
Even at a 28.5 price-to-earnings (P/E) ratio, Apple stock isn't expensive, especially for such a high-quality business and when compared to the S&P 500's 27.8 P/E.
But Apple had just an 11.2 P/E on Jan. 1, 2016, which is hard to believe. Back then, the stock was out of favor, and the high-margin services segment hadn't yet made a material impact on the company. In this vein, it truly was a value play, which is probably why it attracted the attention of Berkshire, which isn't known for taking such large positions in tech stocks.
Berkshire remains heavily invested in various industries that power the U.S. economy, but it is also taking action to build cash. Investors who want to take advantage of a high risk-free rate could follow Berkshire's lead and keep some money in cash.
When looking at investors you admire, it's important to understand the context and motives of their decisions. Berkshire's sale of Apple is sizable and, frankly, a bit surprising. It suggests that the easy money has already been made in Apple -- which is probably true for any company valued at close to $3 trillion.
But it doesn't mean the stock is terribly overvalued or worth avoiding completely. It's highly unlikely Apple will increase in value by the same multiple it has over the last few years, but it still has the fundamentals to outperform the market over the long term.
