Warren Buffett is legendary for perhaps the greatest long-term investing performance in history. Michael Burry is legendary in his own right for his shorting the housing market and banks before the financial crisis of 2008, immortalized in the movie The Big Short.
This week, major hedge funds released their 13F forms, showing their buys, sells, and existing holdings in their long portfolios as of the end of the first quarter. Perhaps the most interesting takeaway was that Buffett, or at least someone at his conglomerate Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%), bought even more shares of Apple (AAPL -0.81%) last quarter, despite its already being Berkshire's largest position. At the same time, Burry's Scion Asset Management made a significant short bet against Apple.
So who is right, and what conclusions can investors draw?
I'm more surprised by Buffett's buy than Burry's sell
In the first quarter, Berkshire bought another 3.8 million shares of Apple. That sounds like a lot, but it's a negligible amount compared to Berkshire's 891 million shares in total.
While Apple declined in the first quarter of 2022 along with the market, it still held up relatively well and trades at a reasonable, though not exactly cheap, valuation of 24 times earnings, even near today's lower prices. That seems like a bit too high a valuation for Buffett to be buying more shares. After all, the price of Apple stock is more than five times as high as it was when Berkshire first began buying the stock back in mid-2016.
That leads me to believe the buys could have been made by either Todd Combs or Ted Weschler, who manage smaller portfolios at Berkshire. More likely, it could be an investment by one of the pension funds at a company Berkshire wholly owns. Those purchases also show up in Berkshire's documents.
Meanwhile, Burry's bet against Apple was not as surprising, although it was perhaps surprising how big it was. In the first quarter, Burry bought put options with an underlying value of 206,000 shares of Apple. A put option gives the holder the right, but not the obligation, to sell a certain amount of shares at a certain price at a certain time.
The shares underlying the options account for 17.9% of the long part of Burry's portfolio, its largest position. Although we don't know the strike prices or time frames for Burry's put options, the put purchase is a way of adding leverage to his bearish bet. If Apple doesn't fall beneath a certain price by that time, the put options would expire worthless. Needless to say, Burry's bet against Apple is much more aggressive, considering the underlying value of the shares was the largest position in his portfolio.
Image source: The Motley Fool.
Why short Apple, relative to other tech stocks?
It's unclear if Burry chose Apple for Apple-specific reasons, or the fact that it's the largest company in the Nasdaq Composite. Coming into 2022, Apple had also held up much better than the expensive software and electric vehicle stocks Burry had been shorting last year. Late last year, Burry revealed a short bet against Tesla, among other expensive-looking tech stocks. He was also short Treasury bonds, in a bet that interest rates would rise.
Last June, Burry called the market and financial assets, generally, "the greatest speculative bubble of all time in all things," while also predicting the "mother of all crashes." It appears as though that was a prescient call, as highly valued growth stocks have been decimated as interest rates have risen sharply this year.
Still, in market downturns, it's usually the strongest "generals" like Apple that fall last, so Burry may be making the bet that since other high-priced speculative tech stocks have already crashed, large-cap tech stocks like Apple could be next. It should also be known that 13Fs don't reveal short bets, so the Apple put option bet may not even be Burry's only bet against the market. He may be short other stocks outright.
But Burry isn't against all of tech, and Buffett seems to like other sectors better than Apple these days
While Buffett did increase Berkshire's bet on Apple, it's pretty clear he likes other sectors better these days. Berkshire recently increased its bets on oil stocks in a big way, and also bought some banks, seemingly betting on higher oil prices and interest rates.
Meanwhile, it's curious that Burry also actually went long other technology stocks, most notably Alphabet, Meta Platforms, and Booking Holdings, in the first quarter. It appears as though this could be a bet on a shift away from buying electronic appliances like iPhones and laptops to more travel and experiences. Booking Holdings is an online travel agent, and Alphabet mentioned on its recent earnings call that travel searches were strong. Meanwhile, Meta Platforms became very cheap after it declined following its fourth-quarter report back in February. Perhaps most importantly, each of these three tech stocks is cheaper than Apple on a forward price-to-earnings basis:
AAPL PE Ratio (Forward) data by YCharts
Investors should stick with their long-term plan on Apple
While it's interesting to note two big investors taking very opposite sides of a popular stock, it shouldn't necessarily affect how long-term investors should view Apple. Remember, Buffett is a long-term, long-only investor, who wouldn't cut ties with Apple unless he thought its competitive advantages had waned, even if the stock may be a tad highly valued at present.
Meanwhile, Burry is a hedge fund manager who makes trades very often. For instance, last quarter, he sold off five of his six existing positions in his long portfolio and bought 11 new positions. That's a lot of trading, and it's not really a long-term investing philosophy.
Therefore, it's possible both could be right. Burry looks to have been right in the short term, as Apple's stock is down about 14% since the beginning of April. However, given how often Burry trades, it's possible he may have already sold off these puts by now. But maybe not.
In the near term, Apple has guided for its next quarter to be affected by supply chain shortages. However, over the long term, its brand, sticky ecosystem, and cash-rich balance sheet make it a pretty solid stock. Therefore, shareholders shouldn't necessarily dump their Apple stock based on Burry's short, unless you need the money in the near term. Long-term, Apple is still an excellent business, and it remains Buffett's largest position.
