Part of Warren Buffett’s mystique is his fondness for a good value. He still lives in an Omaha house he bought in the 1950s. Buffett’s license plate at one point read “Thrifty.”
When it comes to Apple Inc., however, Buffett’s firm isn’t exactly plucking from the bargain bin.
Berkshire Hathaway Inc. first disclosed a $1 billion stake in Apple shares last year. (Buffett has said that he didn’t make the Apple investment personally, but one of his stock-picking lieutenants did.) Berkshire has been adding to its Apple stock holdings since then and piled on big time during the last three months of 2016.
Berkshire’s Apple holdings more than tripled in the fourth quarter, to 57.4 million shares as of Dec. 31 from 15.2 million three months earlier. The firm’s Apple stock is valued at $7.7 billion and amounts to about 1.1 percent of Apple’s total shares. Suddenly Warren Buffett and his pals are among Apple’s 10-biggest shareholders.
The first investment from value investor Berkshire last year was a symbol of Apple’s transformation from an impossibly fast growing and impossibly profitable company with cheap shares to a slower growing and still impossibly profitable company with cheap shares.
But those shares aren’t so cheap anymore. At the point when Berkshire first bought Apple stock in the first quarter of 2016, the company’s stock price was down in the dumps and its shares on average were trading at a price to forward earnings ratio of 10.4, below Apple’s five-year average of 12, according to Bloomberg data.
Apple’s share discount has been erased, however. Berkshire doesn’t disclose exactly when in the fourth quarter it added to its Apple stake. But during the final three months of 2016 Apple’s average price-to-forward earnings ratio was 12.4 — above the five-year average. Of course if Apple’s enormous cash stockpile is stripped out, the company’s shares remain a bargain compared with the overall stock market, as they have for many years.
If Berkshire continues to gorge at the Apple stock buffet, Buffett’s firm is getting even less of a steal. Apple shares now trade at 14.4 times the average of analysts’ estimates for earnings over the next year. On that basis, Apple’s valuation is creeping up on its five-year peak of 15.1 times forward earnings set in late 2014, when investors were going crazy over the launch of the company’s blockbuster iPhone 6.
Berkshire may not have justified Buffett’s bargain-hunting reputation in its Apple stock buying, but the investment sure was well timed. In the first quarter of 2016, when Berkshire first bought Apple shares, the company’s stock was trading at a volume-weighted average price of $97.61. Apple shares have climbed 38 percent since then. Buffett’s not a fan of timing the market, but even he has got to grin at that gain. — Bloomberg
Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket