Warren Buffett's Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) stock portfolio is one of the world's most closely followed collections of stocks. The reason is simple: Buffett has led Berkshire to market-crushing gains over a long period of time. A $1,000 investment in Berkshire Hathaway at its IPO would be worth $2.4 million today.
Berkshire Hathaway's success is due to several factors, but the part that most investors pay attention to is Buffett's stock-buying decisions. Of interest lately has been the company's stake in Apple(NASDAQ: AAPL), which it has been selling off during the year. In the third quarter of 2024, Buffett sold even more, reducing the position by an additional $23 billion.
All told, Buffett and Berkshire have booked $95 billion in Apple stock gains in 2024. This has led many to speculate on the reason for the selling. Investors may get some insights at the Berkshire Hathaway annual meeting in the spring, but in the meantime, here's what investors need to know about Buffett's Apple stock sales.
Buffett still believes in Apple
The least likely scenario for the sale is that Buffett has lost confidence in the company. On several occasions in the past, Buffett has heaped praise on both Apple and its CEO, Tim Cook. At the Berkshire annual meeting in 2024, Buffett said that he would own Apple "unless something really extraordinary happens." It's difficult to argue that the company is significantly different now than it was in May.
Buffett values brand and leadership very highly. Apple is still one of the most recognizable brands in the world, and Tim Cook has a long track record of success at the company. Buffett has called Cook "brilliant" and praised his managerial touch. Since leadership at Apple has remained stable and consistent, it's easy to conclude that Buffett still thinks highly of the company.
Valuation may play a part
When Buffett first purchased Apple in 2016, it surprised many investors, since Buffett had not invested in many tech stocks over his storied career. Looking at Apple today, it's hard to believe the longtime value investor found Apple compelling. But it's worth remembering that at the time of Berkshire's initial purchase, Apple was trading for around 11 times trailing earnings and was approaching all-time lows.
Today, Apple is one of the largest companies in the world, trades for 37 times earnings, and is near all-time highs. There's no doubt Buffett has strict criteria for buying a stock, ensuring he feels he's buying shares for a discount to intrinsic value. It is, therefore, reasonable to assume he would consider selling once a company exceeds intrinsic value.
Apple's role in the Berkshire portfolio
In the same 2021 annual letter where he called Tim Cook a genius, Buffett pointed out that even though Berkshire only received $785 million in dividends that year, its Apple stake grew well beyond that due to Apple's aggressive share repurchases. This is an example of how Apple's stock appreciation, dividend payments, and stock repurchases compounded to make Apple the largest part of Buffett's portfolio.
At the end of 2023, Apple accounted for nearly 50% of the value of Berkshire's equity portfolio. Buffett initially trimmed the position during the fourth quarter of 2023. By the end of the most recently reported quarter, Q3 2024, the Apple stake only represented 26% of the portfolio. This significant reduction could have been just to reduce the exposure to Apple within the overall portfolio.
Building the cash pile
Berkshire Hathaway is never short on cash, but Buffett seems to believe it's prudent to have even more. Consider its increase in cash and short-term investments over the past few years.
BRK.A Cash and Short-Term Investments (Quarterly) data by YCharts.
Buffett has expressed his belief that taxes were likely to increase in the future, so it's possible the Apple sale was partly to avoid paying more to Uncle Sam. Or it could be that Buffett is building up the defenses for whenever the next market downturn comes. That's when he wants to put Berkshire's cash reserves to work -- be greedy when others are fearful. A third possibility is that the cash from the Apple sale could be used in a future acquisition.
Regardless of the reason, there's no doubt that Berkshire's cash hoard gives Buffett enormous optionality no matter what the future holds. Until Buffett addresses his plans directly, investors may never know exactly why he's sold so much of his stake in Apple. However, the decision was likely more about caution and flexibility for Berkshire than it was about any concern about Apple's business.
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Jeff Santoro has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
