Berkshire is unlikely to sell all of its Apple stock, but the sale could make investors rethink Buffett’s perception of Apple and possibly the market as a whole.
One of the most surprising bits of news from this year’s Berkshire Hathaway (BRK.A 1.00%) (BRK.B 0.79%) shareholder’s meeting was the reduction in its position in Apple (AAPL -0.69%) stock. The revelation that Berkshire’s Apple position is now worth $135.4 billion implies that Warren Buffett’s company holds around 790 million, marking a reduction of about 13%.
Dumping more than 100 million shares in a short time frame naturally leads to questions as to why. Buffett implied the sale was for tax reasons, possibly in anticipation of higher tax rates in future years.
Nonetheless, Berkshire’s history with Apple offers valuable investment lessons, and investors should know three things about Berkshire’s sale of Apple stock.
1. Apple is no longer a bargain stock
Most investors know Buffett tends to seek bargains. When Buffett’s investment managers first talked him into buying Apple in 2016, Apple stock rarely exceeded a 20 P/E ratio, trading between 12 and 18 times earnings.
Additionally, Berkshire bought most of its shares between the second quarter of 2016 and the second quarter of 2018. Its market cap was between $500 billion and $900 billion at that time, compared to $2.8 trillion today. While that investment may have taken some time to bear fruit, Apple has earned considerable returns for Buffett’s company.
Today, Apple’s P/E ratio is around 28, and it has often traded at a 30 earnings multiple over the last year, a factor that could have led to the decision to sell some of the shares.
AAPL PE Ratio data by YCharts
2. Holding cash is importantÂ
The Apple sale increased Berkshire’s cash hoard to $189 billion, up from $168 billion in the fourth quarter. This takes its liquidity position to record highs.
To put that into perspective, only 50 companies trading on U.S. exchanges have a market cap higher than $189 billion. Apple itself has followed this lead with around $162 billion in fair value liquidity.
That may lead to speculation about the market’s near-term direction and what Berkshire plans to do with this cash. Even though interest rates have risen, storing this cash in short-term Treasurys is probably not the company’s long-term plan.
As mentioned before, Buffett likes to buy bargains. The market’s Shiller P/E ratio, which is the price divided by the average of 10 years of earnings, is 34, well above the mean of 17 going back to 1871.
That multiple indicates the market has become expensive, but whether that implies a near-term market downturn remains to be seen. Timing the market is nearly impossible, even for a seasoned investor like Buffett. Nonetheless, if a sell-off leads to more underpriced stocks, having the cash available to act when stocks are inexpensive can boost overall returns.
3. Apple will likely remain a solid long-term investment
Furthermore, Buffett stated that Apple will likely remain Berkshire’s largest position at the end of 2024. In a sense, this doesn’t say much about the stocks Warren Buffett owns. Even after recent sales, Apple is around 40% of Berkshire’s stock portfolio, well above its second-largest holding, Bank of America, at around 12%. That means Berkshire could sell more Apple stock and argue it is a diversification move.
However, Apple CEO Tim Cook attended the recent Berkshire Hathaway shareholder meeting, implying Cook continues to maintain a strong relationship with Buffett and his company.
Moreover, Buffett recognizes the appeal of Apple and its products, which likely inspired him to buy Apple stock in the previous decade. Thus, Buffett will likely continue to hold an Apple position, even if a market downturn is coming.
Warren Buffett and Apple
Ultimately, investors should not only hold to the long-term investment case for Apple stock but also learn from the investment lessons offered by Berkshire’s history with Apple.
As previously mentioned, Berkshire bought most of its Apple shares when the stock sold at low valuations. The lesson of looking for bargains has served Buffett and other investors well. The massive and growing cash position may or may not indicate a downturn is coming soon, but investors should have the cash to act when such bargains come along.
Finally, quality stocks typically remain excellent investments during both bull and bear markets. Riding out previous bear markets has served Apple investors well, and it is likely they should continue to do so in the future.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.