Warren Buffett is one of the most closely monitored investors in the world. Whenever the billionaire buys or sells a stock, it makes headlines around the global financial community.
According to Berkshire Hathaway's most recent 13F filing, Buffet sold 116 million shares of Apple (AAPL -0.82%) during the first quarter. Just three years ago, Buffett proclaimed that Apple was "probably the best business I know in the world" during an interview on CNBC.
Has Buffett lost faith in the iPhone maker?
Let's dig into Buffett's latest move, and assess whether now is a time to follow his lead.
Reading Buffett's tea leaves
Buffett has a long history of avoiding the technology sector. For decades, dominant features of Berkshire's portfolio included bank stocks, insurance companies, and consumer packaged goods businesses.
However, one of Buffett's most stringent investment criteria is owning companies that generate steady cash flow. While the technology industry often experiences outsized volatility, Apple was seen as a diamond in the rough. The reason? Despite being a tech business, the company is massively profitable.
So, in 2016, Buffett turned heads after revealing he took a sizable position in Apple stock. Over the last eight years, shares in Apple have risen over 600%. I think it's fair to say that Buffett made a wise choice in owning Apple stock.
Given the meteoric rise of Apple's stock price in a relatively short timeframe, the company quickly became Buffett's top position -- eclipsing more than 50% of Berkshire's portfolio. Even long-term investors have to make tweaks to portfolio allocations from time to time, and Buffett's trimming of Apple stock is a clear example.
During Berkshire's 2024 shareholder meeting a couple of weeks ago, Buffett addressed the reduction of his Apple position head-on.
He made an analogy by explaining that the federal government is technically an owner of U.S. businesses via corporate tax payments. Buffett went on to say that the government can change the corporate tax rate in any given year, and that he thinks "higher taxes are quite likely."
Image source: Getty Images.
Apple is still Buffett's largest position
Although there's never really a perfect time to sell a stock, Buffett's insights above are intriguing. Basically, he's alluding that if tax rates indeed rise, then Berkshire would be required to pay higher capital gains on Apple in the future.
Since Buffett is sitting on a multibagger with Apple, it makes sense that he would liquidate a portion of his position and collect some gains before tax rates potentially change.
Even though Buffett reduced his Apple holding by about 13%, the iPhone maker still comprises a whopping 41% of Berkshire's portfolio. This handily makes Apple the largest holding for Buffett, with his second biggest position comprising only 12% of his portfolio.
Is now a good time to buy Apple stock?
As of the time of this article, Apple trades at a forward price-to-earnings (P/E) ratio of 28.8 -- well above the S&P 500's forward P/E of 20.8.
When a stock trades at a premium to the broader market, it could be because investors broadly view the growth prospects of the business as superior to what they could find elsewhere. Personally, I don't think this idea holds merit with Apple.
The company is very much at a crossroads right now. Apple has remained frustratingly quiet as it relates to its ambitions with artificial intelligence (AI) -- an area where all of its "Magnificent Seven" peers are investing billions.
Furthermore, Apple's revenue has declined each quarter except one for over a year now. The primary reasons for the company's deceleration are stalling iPhone sales and waning demand in China.
I suspect Buffett isn't too worried about Apple's current situation. He generally owns stocks for decades, so a bump in the road is par for the course for him. It's hard to question this strategy, as holding on to high-conviction stocks over a long-term investment horizon is a proven way to build wealth.
However, for investors looking for more growth opportunities, I think it would behoove you to pass on Apple right now. While the company could emerge as a leader in AI and ignite some new enthusiasm from investors, I see the stock as too expensive relative to its current performance and would like to see some growth turnaround before scooping up more shares.
