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Did Buffett Overlook Apple in Pursuit of Elephants?

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Apple (AAPL) stock has been rising since its earnings beat in the latest quarterly results. However, Warren Buffett, Berkshire Hathaway’s (BRK.A) (BRK.B) (BRK-B) chairman, has stayed away from Apple stock in 2019. Berkshire Hathaway acquired a stake in Apple stock in 2016 The company increased its stake. However, in the fourth quarter of 2018, the company trimmed its stake in Apple marginally.

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Buffett on Apple’s stock price

Buffett has reservations about Apple’s stock price. Although he likes and admires the company and its products, he might not be comfortable with the valuation. Currently, Apple stock is trading near $255—close to its 52-week high. The stock has risen 62% in the current year. Buffett seems to have missed the rally in Apple stock in 2019. He probably overlooked Apple in pursuit of his “elephant-sized acquisition.”

Berkshire’s elephant-sized acquisition

Buffett has a unique investment style. He has been searching for an elephant-sized acquisition. Since Berkshire Hathaway has a huge cash pile, it’s ready for an attractive investment opportunity. Buffett looks for firms that generate strong cash flows and require lower capital outlays. His favorite picks are big firms with strong brands. In the current year, the company has been looking for a big-ticket investment. However, Berkshire Hathaway hasn’t found anything yet.

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Apple stock surges on strong earnings

Apple has risen 5% since its earnings were released on October 31. The stock rose due to better-than-expected revenues and earnings. Apple’s revenues rose 2% YoY to an all-time high of $64 billion in the fourth quarter. The company’s quarterly EPS also rose from $2.91 last year to new highs of $3.03 this year. Apple reported record operating cash flows of $19.9 billion in the quarter.

The brilliant performance came after rising segmental revenues. Apple’s iPad, wearables, home and accessories, and services segments’ revenues rose 17%, 54%, and 18% YoY, respectively. These three segments, which contributed 30% to Apple’s total revenues in the fourth quarter of 2018, added 37% in the fourth quarter. Although the company’s iPhone sales fell in the quarter,  management is confident that new iPhone versions should support its sales in upcoming quarters.

In the earnings press release, Apple CEO Tim Cook said, “With customers and reviewers raving about the new generation of iPhones, today’s debut of new, noise-canceling AirPods Pro, the hotly-anticipated arrival of Apple TV+ just two days away, and our best lineup of products and services ever, we’re very optimistic about what the holiday quarter has in store.”

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How does Buffett want to play Apple stock?

Buffett wants to buy the stock at a reasonable price. In February, in a CNBC report, he said, “But Apple I don’t see myself selling. Every – the lower it goes, the better I like it, obviously.” Buffett said that Berkshire Hathaway’s stake will rise automatically in Apple if the company buys back shares. He likes that kind of scenario.

Buffett said that he owned roughly a 5% stake in Apple. The stake could increase to more than 6% in the next three years if the company continues buybacks, which will reduce Apple’s total outstanding shares to about 4 billion. Apple’s diluted shares, as of September 30, were 4.5 billion. In the year ending in September, Apple bought back $67 billion worth of shares.

Berkshire Hathaway’s top holdings

According to the latest filing available, Apple was Berkshire Hathaway’s top holding. The company held 249.6 million Apple shares valued at around $49 billion at the end of the second quarter. Apple is followed by Bank of America. Berkshire Hathaway held about 927 million Bank of America shares valued at roughly $27 billion. The company held Coca-Cola and Wells Fargo shares valued at $20 billion and $19 billion, respectively, at the end of the second quarter.

The company also held 151.6 million American Express shares valued at $18.7 billion. American Express stock has risen 28% in the current year. Berkshire Hathaway also held Amazon (AMZN) stock valued at $1 billion. The stock has risen about 20% in 2019. Amazon stock fell after its third-quarter earnings. Read Amazon Stock Survived an Earnings Miss—What Next? to learn more.

In hindsight, investors could criticize Buffett for not buying more Apple shares in the sell-off during the fourth quarter of 2018. Notably, the decision surprised markets. Analysts expected Berkshire Hathaway to add more shares amid the sell-off. Buffett has owned up to many mistakes including missing out on companies like Amazon. In the future, he might admit to missing out on adding more Apple shares in the sell-off during the fourth quarter of 2018.

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