- Berkshire Hathaway’s stake in Apple is now over 25% of the investing conglomerate’s market cap.
- The stake constitutes over 50% of Berkshire’s publicly-traded U.S. stocks.
- As profit growth slows, Apple’s stock appreciation has been driven mainly by buybacks, whose effectiveness is waning.
Berkshire Hathaway’s (NYSE:BRK.A) stake in Apple (NASDAQ:AAPL) now comprises over 50% of the investing conglomerate’s entire portfolio of publicly-traded U.S. stocks. Apple also represents a quarter of the whole market cap of Berkshire Hathaway.
Even Berkshire’s combined stake in banks, which have long been a Warren Buffett favorite, does not come close.
Warren Buffett, who has famously shied away from tech stocks, now finds himself holding an extraordinarily large stake in Apple. | Source: @chetanp/Twitter
With Berkshire having bought Apple at an average price of $141, the stock might seem like the ideal investment. It is now just three dollars shy of $500.
Warren Buffett Should Reduce the Exposure
Warren Buffett advocates a strategy of buying and holding forever whenever a good investment opportunity presents itself. But when the value of just one stock constitutes more than half of a portfolio that comprises over 35 stocks, there should be an urgent need to rebalance.
It’s time Buffet broke his rule, trimmed Berkshire Hathaway’s position in Apple, and took some profit.
There are two reasons why.
1. The Declining Effectiveness of Apple Stock Buybacks
As of 2019, Apple had spent $327 billion on stock buybacks since the repurchase program started eight years ago. With the program still running, the figure could hit nearly $400 billion before the end of 2020.
The value of Apple’s stock buybacks is now equivalent to the market cap of several leading S&P 500 giants. | Source: AboveAvalon
The program has resulted in Apple buying back around 2.5 billion shares at an average price of $131.
The stock has now nearly quadrupled, which means Apple needs to spend a lot more to buy back shares compared with the average price. This means that share buybacks, which have been a significant driver in the stock’s ascent, are no longer as effective.
There are myriad other factors that cause stocks to appreciate, but other metrics that would have attracted investors are deteriorating too. Apple’s dividend yield is currently around 0.7%. The average for the S&P 500 index is 1.8%.
Apple’s price-to-earnings ratio is nearly 38, a level last reached in 2007. The stock price fell by more than half the following year.
The last time Apple reached a PE of nearly 40, its stock went on to fall by around 50%. | Source: Macrotrends
With Apple’s stock now in the expensive territory, chances of a correction have increased. If Buffett took profits now, he would have more opportunities to repurchase in the future once a correction occurs.
2. The Regulatory Cloud Hanging Over Apple
With iPhone sales peaking in 2017, Apple has been touting services as the next growth frontier. But one of the segments driving the services revenues, the App Store, is the subject of intense regulatory scrutiny.
In the U.S., an antitrust investigation has been running for over a year. Epic Games also recently filed a lawsuit against Apple, accusing the iPhone maker of monopolistic practices.
The App Store is in the spotlight over the 30% fees charged to developers. | Source: @inafried/Twitter
Across the Atlantic, the European Commission has opened two antitrust investigations into the App Store. This came after Spotify (NYSE:SPOT) and others complained about Apple’s 30% cut on App Store sales.
News publishers under the Digital Content Next umbrella are seeking a special deal that would halve the 30% App Store fee. Depending on the outcome, expect the clamor for special deals from other industries and sectors to grow.
An epic court battle is underway between Apple and Epic Games. Watch the video below for more details.
Regulatory and legal scrutiny shines a negative spotlight on Apple. As greed runs amok in the stock markets, Warren Buffett would be wise to let the fear creep in.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.
Last modified: August 22, 2020 3:37 PM UTC