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Warren Buffett's Berkshire Hathaway Takes a Bite Out of Carl Icahn's Discarded Apple

By Alex Dumortier, CFA - May 16, 2016 at 12:01PM

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Warren Buffett's Berkshire Hathaway discloses a billion-dollar investment in Apple Inc. in a huge vote of confidence for the iPhone maker.

U.S. stocks are higher in late morning trading on Monday, with the S&P 500 (^GSPC 1.05%) and the Dow Jones Industrial Average (^DJI) (DJINDICES: $INDU) up 0.76% and 0.79%, respectively, at 11:40 a.m. ET. The rise in oil prices (see the second story) is almost certainly contributing to today's optimism.

Warren Buffett takes a bite out of Apple

Today is the deadline for investment managers to report their end-of-first-quarter holdings to the Securities and Exchange Commission, but there is already one beneficiary. Shares of Apple Inc. are up 3.42% on the news that Warren Buffett's conglomerate, Berkshire Hathaway, has initiated a position in the iPhone maker valued at over $1 billion at the end of the first quarter.

It's the size of the stake that is surprising because it suggests the investment may "belong" to Warren Buffett rather than one of the two investment managers who are managing money on Berkshire's behalf.

At last month's annual meeting, Buffett said Todd Combs and Ted Weschler manage $9 billion each, so taking a billion-dollar position is in the realm of possibility, but it looks unlikely.

If Buffett, who famously avoids investing in the technology sector, did indeed add Apple to Berkshire's stock portfolio, does this mean he's rethinking his investment approach at age 85?

The answer is an emphatic "No!" Instead, it would reflect Buffett's judgement that Apple meets his stringent criteria for an investment, chief among which:

  • Apple has an established high-quality, well-protected business.
  • Despite the fact that it's a technology company, Apple's business has sufficient stability and visibility for inclusion in a long-term investor's portfolio.
  • Apple's executive management, led by CEO Tim Cook, is able and honest.
  • Last -- but by no means least for a value investor -- Apple's shares are priced attractively.

You won't find me disagreeing: This Fool has been banging the drum, saying Apple's stock represents an opportunity for months (see here and here, for example). Following Carl Icahn's disclosure at the end of April that he closed out his multibillion-dollar position in Apple, this is a wonderful vote of confidence for a company that has been in Wall Street's doghouse. Apple shares remain an attractive buy, today's "Buffett pop" notwithstanding.

Oil: Two heavyweights think things are looking up

Now let's move from Apple, a company that has successfully defended its products against commoditization, to plain commodities. Back in February, Goldman Sachs spooked the market with a prediction that oil prices could fall below $20 per barrel. However, the most closely followed investment bank in commodities markets published a note today with a far less bearish tone, writing:

The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected ...

The market likely shifted into deficit in May ... driven by both sustained strong demand as well as sharply declining production.

Energy expert Daniel Yergin, author of the seminal The Prize, writing in today's The Wall Street Journal, is also upbeat [subscription required]:

Current prices in the mid-to-high $40s are signaling a turn in the market ... World production still exceeds consumption. Yet by autumn declining production and rising demand should put the market roughly in balance, with prices around $50 a barrel, although still with a big overhang in oil inventories.

This optimism is reverberating through the market today (well, mainly Goldman's -- the bank is more influential than Yergin); the price of oil futures for June delivery is up 2.99% at $47.59.

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