In this segment from the MarketFoolery podcast, Chris Hill, Jason Moser, and Taylor Muckerman explain why the billionaire investor's company bought in. Learn why Apple isn't the same investment now that it was 10 years ago and why this move is much more in line with Berkshire's investment philosophies than it first seems. To wrap-up, the team runs down a couple other moves Berkshire Hathaway announced in its most recent 13-F filing.
A full transcript follows the video.
This podcast was recorded on May 16, 2016.
Chris Hill: Let's move over to Berkshire Hathaway. Why don't we start with the 13F filing, their quarterly filing. We'll get to the big stakes that Berkshire Hathaway owns, and the degree to which they are increasing or decreasing some of those large stakes. But the headline is that Berkshire Hathaway is now a shareholder of a little fruit company we like to call Apple. All the reports indicate that this was not Buffett's call, this was ... was it Ted Weschler?
Jason Moser: Either Combs or Weschler. I haven't read if they named one or the other, but I know ...
Hill: One of his trusted lieutenants made this purchase.
Moser: Yeah. That makes sense. I think, more and more, as time goes on, we're going to see that's generally the case, where those two are going to be making probably more of the equity investments. I think Buffett, and maybe Munger, to a lesser degree, can use their reputation in the business world as perhaps facilitating deals or helping to back deals, like they've done, or, it's being rumored, at least, that they're going to do something like that with Yahoo.
I mean, you have these two guys who are younger, have maybe a little bit of a different perspective on the world. They invest very similarly to how Warren Buffett invests. But I'm sure they probably feel like they have a better grasp on technology than perhaps Buffett feels he might, which could explain a lot behind this deal. But, they have virtually infinite financial resources, so they really need to figure out ways to play big ideas, and Apple is by far one of the biggest.
Taylor Muckerman: Kind of fits the mold. Didn't they invest in Kinder Morgan when Kinder Morgan sold off. So, you see Apple selling off quite considerably. So possibly, just seeking that value that Buffett was known for for the long tenure of his career so far.
Hill: Do we run the risk of trying to read too much into this? I'm just thinking about anyone who is looking at this move. Again, this is not Buffett, this is one of his lieutenants. I think it would be understandable for an investor looking at this move to ask the question, "Does this give us a glimpse into the future of Berkshire Hathaway post-Warren Buffett?" And I'm wondering, that may be true, although, do we risk reading too much into that? That once Buffett, for whatever reason, is no longer running Berkshire Hathaway, do we see a lot more move in into technology investments? Or, was this just the best use of capital at this time?
Muckerman: I think with Apple, it's a tech stock, yes, but it's the biggest stock in the world, just ahead of Google. It's not your average small-cap, mid-cap tech stock that's going to be this volatile beast that you don't really understand. It's a cash-generating machine. It has a dividend now. I don't think it's your typical tech stock. It might be a first foray into it, really. But I don't think it's signaling a significant sea change here.
Moser: No. And I think, probably, as time goes on, just the way the world changes, the way technology moves so fast, just that alone, Berkshire Hathaway is more or less going to have to dip a toe into the tech space a little bit more as time goes on. But yeah, to Taylor's point there, Apple is not your typical tech company. You're buying, really, one of the most powerful brands on the entire planet. It's probably a bit easier for them to look at this and say, "They're selling a product. They're selling phones and tablets and the software that goes with it." It's pretty easy business to understand.
That said, where Apple is today versus where it was 10 years ago, this is a fundamentally different investment now. This is not like investing in some growth-style tech company that could have multibagger status in the next five to 10 years. Chances are that's not going to happen. And when you go through the rest of Berkshire's portfolio, you see a lot of those old reliables in there, like Moody's and Phillips 66 and General Electric and IBM and Coca-Cola and Wells Fargo. Apple, I think, is the same type of business. And people identify it very much the same way.
I'm a little surprised that, given all of the positive sentiment that Buffett has offered toward Jeff Bezos and what he's done in his life with Amazon, I really honestly thought maybe we would see Berkshire consider initiating a position in Amazon, because they have a huge position in Walmart, and I think a lot of us believe that Walmart is sort of the old guard there, and Amazon is really the new guard, when it comes to retail. And again, retail is not all that difficult to understand. Amazon I would also put in there as a tech company, because they are.
Hill: They're not paying a dividend, though.
Muckerman: No, not quite.
Moser: That's true, but I also, if you're asking me which one out-performs in the next five years, I'm picking Amazon without even thinking twice about it. Carl Icahn just recently divested from Apple, saying it was no longer the no-brainer that he once said it was. That ultimately is the market. People disagree, and you pick a side there. But it seems like they at least feel like there's going to be some kind of an attractive return here in the next few years.
Muckerman: Carl Icahn didn't really get what he wanted in terms of activism, the higher shareholder returns in terms of a dividend or share buyback. So maybe he's admitting defeat moreso than Apple might not be a great stock for the next few years.
Moser: And he was pegging Apple shares at some point in the past year as maybe a double from their current levels. Granted, that wasn't all organic growth, that would share buybacks along with whatever product came in the pipeline there. I think a lot of us felt that was maybe a bit optimistic as well, especially when you look at how Apple has performed. Go back to 2012, when they initiated the dividend. It's not like it's out-performed the market. It really hasn't. So, I would love to see them juice the dividend to little bit. Buybacks are fine. And if we happen to see a tax holiday at some point where they can bring some of that cash back home, that would probably be a catalyst as well.
Hill: You mentioned Berkshire Hathaway's stake in Wal-Mart. That is one of the smaller headlines today -- when you look at where the investments are, and the big investments that Berkshire Hathaway makes, we have seen it disclosed that they have a smaller stake in Walmart, MasterCard, Procter & Gamble. They've increased their stake in IBM, Phillips 66 and Visa. I'm assuming that the Visa / MasterCard is not so much that they greatly prefer Visa to MasterCard. That may have just been simply a slight overweighting issue. It's not like AT&T where they outright eliminated their stake.
Phillips 66. Any insight into the increase in their stake there?
Muckerman: Not really. I mean, it's one of the bigger downstream companies in the U.S., in the world. It could certainly be a play on the chemical side of the business, which, chemicals, they're benefiting from low oil prices, they're benefiting from low natural gas prices. I think the growth in what we use chemicals for, certainly has a bright future. I think it's more along the lines of not gasoline but the other byproducts you're getting out of Phillips 66. And they're putting a lot of money into that business. I think that might be what they're looking at. And, obviously, energy has been suffering for a while. So maybe there's a value side to that play, as well.