The most revered value investor of our time, Warren Buffett, has decided that shares of Apple Inc. represent a good buy. According to a recent SEC filing, his holding company, Berkshire Hathaway (BRK.B) bought shares worth about $1 billion during the first quarter.
Apple at a low, Buffet sees opportunity
The news comes at a time where Apple investor confidence has hit a road bump in terms of growth expectations. In a LearnBonds article just two ago, I discussed the hit that shares had taken amidst a quasi-panic over its latest quarterly report. While I had not purchased more shares at that time, I did add about 20% to my existing position between then and now.
Interestingly enough, it appears that Buffett was buying shares from another investment luminary over the past several months. Carl Icahn, the famed corporate raider, who had been a big proponent of Apple over many years, pushing management to buy back shares, announced that he had exited his Apple position.
Like others selling shares, Icahn blamed China for the decision, despite the fact still opining that the stock is quantitatively cheap. This clearly illustrates an interesting diversion of opinion over the market’s largest stock in terms of market capitalization. While Berkshire was buying shares prior to Apple’s recent disappointment, one must wonder if the Oracle of Omaha is having any regrets.
While the “Buffett Effect” clearly was having some impact on early Monday trading, it wasn’t huge. Shares of Apple were up about $2.50 from Friday close, representing only about a 2.75% move on much heavier than normal volume. At a market cap of $500 billion, it takes a whole lot of news to move shares more than that.
Is Buffett Always Right?
While the market tends to offer knee jerk reaction to news from Berkshire Hathway’s vault of holdings, don’t bet your life that you will make money following him in to every position he takes. One of Buffett’s more controversial positions is IBM – International Business Machines. Despite the glorious bull market that we have seen over the past 7 or so years, IBM’s stock has been sliding lower as the company attempts to reinvent itself. Buffett usually implies that he will buy even more on downturns.
Known more today as a services and software company, IBM’s size and revenues continue to decline. Buffett remains patient however, seemingly confident that CEO Ginni Rometty is doing the right things to stabilize the ship. Whether that happens or not is still to be seen. For now, IBM has been a drag on Berkshire Hathaway’s performance over several years.
That’s not to say that the value call on Apple is inaccurate however. As I opined in the prior piece, Apple has seen its share of difficult quarters during its handsome decade-long run. Buffett is clearly placing a bet that reports of the death of the iPhone are premature.
Also compelling here is that Buffett has long eschewed the inherent value in technology companies. Of course Apple is more of a front-line tech player, selling products directly to consumers and enterprise, rather than integrated components, circuitry, or a more enterprise-related platform. Apple’s business model is clearly easier to understand than a small, or even large, component supplier.
Let’s see how Apple does this week
It will be interesting so see how the market trades AAPL this week based on Buffett’s capital infusion. More interesting will be the company’s subsequent quarterly reports which will incrementally reveal whether the current slowdown is temporary in nature — as Buffett and I seem to think, or more secular in nature – as Icahn seems to think.
At current valuation, Apple is attractive. Combine its 2.5% dividend yield and likely robust dividend growth and you have something to really sink your teeth in, even if it’s not the growth story of old.
Of course between iPhone and iPad, Apple is really something of a two-trick pony for now. It may not be wise to assume that the Apple “ecosystem” grows in perpetuity. Given the rampant changes in technology and perhaps less incremental change (and clamor) over subsequent device versions, discounting or closing your eyes to a worse rather than better scenario may be foolish.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.
Adam Aloisi was long shares of Apple at time of writing, but positions can change at any time.