FRI, AUG 09, 2024

WARREN BUFFETT WATCH

There's no easy explanation for cutting Apple stake in half

Warren Buffett's move to sell almost half of Berkshire Hathaway's enormous stake in Apple during the second quarter is as surprising as it is hard to explain.

Apple remains Berkshire's largest equity holding with a market value of $86.4 billion, although it now accounts for around 28% of the portfolio, down from 44%.

It wasn't that long ago that Buffett, when asked at the May annual meeting why Berkshire had sold 13% of its Apple shares in the first quarter, was telling shareholders he expected it would remain Berkshire's largest equity position well into the future, calling it an even better business than long-time (and unchanged) holdings American Express and Coca-Cola.

In 2018, he told CNBC's Becky Quick he'd "love to own 100% of it."

The Apple sales accounted for almost all of Berkshire's net equity sales of $75.5 billion between April and June. It's the seventh straight quarter of net selling.

All that selling, and lack of buying, pushed Berkshire's cash to $277 billion as of June 30.

Almost $240 billion of that is short-term U.S. Treasury T-bills, which is more than the Federal Reserve's $195 billion as of the end of last month.

And so far in the third quarter, Berkshire has disposed of 8.8% of its sizable Bank of America holding, generating around $3.8 billion, over 12 consecutive trading days. (There have been no reported sales since August 1.)

While Buffett has made it clear that it is a mistake to think that Berkshire never sells stocks, he has a well-earned reputation as a long-term investor and has said his favorite holding period is "forever."

Here are some of the explanations being offered to explain the uncharacteristically large Apple sales.

It's a "wake-up call" that Buffett sees trouble ahead for the economy and the stock market

Edward Jones analyst James Shanahan told CNBC.com's Yun Li, "This looks alarming because you have a large and sophisticated investor with a really impressive long-term track record not putting any of his cash to work to buy stocks, and in fact, is massively liquidating."

On CNBC's "Worldwide Exchange" Monday, R360's Barbara Goodstein said, "These look like seismic shifts, and he could be betting on a recession."

Investor's Business Daily quotes Glenview Trust's Bill Stone as saying Buffett's "war chest" of cash will allow Berkshire to "seize the initiative when the time comes."

A counter argument is that Buffett has repeatedly said he doesn't try to predict what the stock market and the economy will do in the future and buys and sells primarily on fundamentals.

While many Apple analysts remain bullish on the stock despite Berkshire's sales, Maxim Group's Tom Forte told "Squawk on the Street" he thinks Buffett's moves "make a lot of sense" because investors are too enthusiastic about the company's AI prospects.

The Apple position had gotten too big

Duetsche Bank's Jim Reid wrote in a note, "It’s still Warren Buffett’s single largest position so it’s possible this will just be seen as risk management."

A counter argument was made by Buffett himself at last year's annual meeting when he said the Apple investment needed to be compared to the size of Berkshire's fully owned businesses, not just what's in its equity portfolio.

"To think that our criteria for Apple is different than the other businesses we own — it just happens to be a better business than any we own. And we put a fair amount of money into it, but we haven't got more money in it than we've got in the railroad [BNSF]."

Tax considerations

At this year's annual meeting, Buffett suggested he was thinking about taxes when Berkshire sold during the first quarter. He said he expects capital gains tax rates will be heading higher, so shareholders won't mind paying a lower rate now on the "little" Apple sale rather than a higher rate later.

That explanation for the second quarter sales, however, feels like a stretch, given their large size.

Munger's death is a factor

Shanahan also notes to IBD that most of Berkshire's Apple sales followed Charlie Munger's death last November. "I wonder, perhaps, if Charlie Munger liked Apple stock more, or was more comfortable with the earnings outlook for Apple, than Warren Buffett is."

At the 2021 meeting, Buffett admitted that reducing Berkshire's Apple position by 8% in the second half of 2020 was "probably a mistake."

He added, "Charlie, in his usual low-key way, let me know" that he thought it was a mistake.

BUFFETT AROUND THE INTERNET

Some links may require a subscription

The New York Times: Has the Long Friendship of Bill Gates and Warren Buffett Reached Its Final Act?

Quartz: Jamie Dimon and Warren Buffett are in agreement, America's economy is resilient

Morningstar: After Earnings, Is Berkshire Hathaway Stock a Buy?

Bloomberg (subscription): Buffett’s Japan Holdings Become ‘Bargain’ After Stock Meltdown

Barron's (subscription): Berkshire Hathaway Plays the Yen Carry Trade—the Right Way

The Motley Fool: Has Kamala Harris Been Taking Investment Advice From Warren Buffett?

HIGHLIGHTS FROM THE ARCHIVE

Berkshire managers 'get to paint their own paintings' (2012)

Warren Buffett explains why he’s not worried about Berkshire’s managers leaving the company after his death.

BERKSHIRE STOCK WATCH

Four weeks

Twelve months

BERKSHIRE'S TOP U.S. STOCK HOLDINGS - Aug. 9, 2024

Berkshire's top holdings of disclosed publicly traded stocks in the U.S., Japan, and Hong Kong, by market value, based on today's closing prices.

Holdings are as of March 31, 2024, as reported in Berkshire Hathaway’s 13F filing on May 15, 2024, except for:

Apple, which is an estimate as of June 30, 2024, based on Berkshire’s 10-Q report showing the approximate market value of the holding as of that date
Bank of America, which is as of August 1, 2024
Mitsubishi, which is as of June 12, 2023. Tokyo Stock Exchange prices are converted to U.S. dollars from Japanese yen.
Occidental Petroleum, which is as of June 17, 2024

The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.

CORRECTIONS, QUESTIONS OR COMMENTS

Correction: In last week's newsletter, the market value of Berkshire's Apple stake should have been $173.6 billion, not $173.6 million. (It's a lot smaller this week, but still not that small.)

Please send any questions or comments about the newsletter to me at alex.crippen@nbcuni.com. (Sorry, but we don't forward questions or comments to Buffett himself.)

If you aren't already subscribed to this newsletter, you can sign up here.

Also, Buffett's annual letters to shareholders are highly-recommended reading. There are collected here on Berkshire's website.

-- Alex Crippen, Editor, Warren Buffett Watch

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