Approximately a quarter of Berkshire Hathaway's substantial $299 billion investment portfolio, led by Warren Buffett, is committed to a single stock.
Thanks to his extraordinary ability to increase capital over numerous decades as the CEO of Berkshire Hathaway, Warren Buffett is likely the most scrutinized investor around. Folks can certainly pick up some tips by following his guidance and actions.
One of Buffett's shrewdest moves was purchasing shares in Apple (AAPL -0.71%), the leader in consumer electronics. Berkshire bought the stock for the first time in the initial quarter of 2016, and ever since the beginning of that year, Apple has skyrocketed 862% (as of Dec. 17), significantly outperforming the S&P 500.
At the moment, 25% of Berkshire's enormous $299 billion portfolio is invested in Apple, making it its leading investment, even after Buffett, the Wise Man of Omaha, reduced the position over the past year. Keep reading to learn what initially caught Buffett's interest and if the stock is worth purchasing now.
Attractive attributes
Close to a decade before Buffett and Berkshire bought their first share in Apple, it was evident that Apple boasted one of the world's most potent brands. The company's successful history of launching and marketing highly sought-after hardware devices allowed it to delight customers. This positioning helped the company leverage its pricing power.
Aside from Apple's strong brand, Buffett likely recognized that the company had a loyal customer base. This is partly thanks to the brand's attractive image.
However, Apple's ecosystem, which combines its hardware offerings with a collection of internally developed software and services to provide an exceptional user experience, effectively keeps customers tethered, discouraging them from switching to competitors' offerings. Buffett even suggested that if someone were offered $10,000 to never use an iPhone again, they would likely turn down the offer without a second thought. This highlights Apple's customer loyalty.
Buffett admires businesses with solid financial health, and it's hard to think of a company more financially fit than Apple. It consistently generates robust operating income and free cash flow, giving management the flexibility to repurchase shares and distribute dividends. As of Sept. 28, Apple had a net cash position of $50 billion, offering investors peace of mind.
During the first quarter of 2016, Apple shares traded at a price-to-earnings ratio (P/E) of 10.6. With the advantage of hindsight, that valuation made the investment opportunity seem like a no-brainer. So, it's no wonder Buffett opted to buy Apple stock then.
Should you buy Apple stock?
Following such remarkable gains in recent years, Apple shares now trade at record prices. The stock isn't cheap compared to its history, with a P/E multiple of 41.7 at the moment. That represents an 86% premium over its average valuation over the last 10 years, making the stock quite expensive.
Buyers paying this high of a P/E ratio isn't ideal in my opinion. It shows increased optimism and enthusiasm for Apple, leaving no room for error for potential investors.
The situation is further complicated by Apple's growth prospects. Analyst predictions suggest that the company's earnings per share will increase at an annual rate of 11.6% over the next three years. This forecast isn't justifiable given the high valuation.
Berkshire sold some of its profits in 2024 before a potential increase in the capital gains tax rate. Additionally, I suspect that valuation might be the reason why Buffett and his team reduced the Apple position.
Investors who want to mimic Buffett now and invest in Apple stock should exercise caution. It's wise to monitor the company and wait patiently. Only consider making a purchase when the P/E ratio drops to around 25.
Given Buffett's significant investment in Apple and its robust financial health, one could argue that understanding finance and investing in similar companies with strong branding, pricing power, and financial health could yield profitable results. Furthermore, carefully considering the price-to-earnings ratio before investing, as Buffett did with Apple, is a crucial aspect of well-informed decision-making in finance and investing with money.
