Warren Buffett, the renowned investor and CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), is widely recognized for his hands-on approach to major investment decisions and capital allocation strategies at the conglomerate. As per Berkshire Hathaway’s financial filings with the Securities and Exchange Commission, Buffett bears ultimate responsibility for steering the company’s vast portfolio and determining where its substantial capital should be deployed.
In recent quarters, Berkshire Hathaway made headlines with significant moves in its investment portfolio. Notably, the conglomerate sold 116 million shares of Apple (NASDAQ: AAPL) during the first quarter of 2024, marking a reduction of 13% in its stake. Despite this reduction, Apple remains the largest single holding within Berkshire’s portfolio, comprising approximately 40% of its total portfolio value, which stood at an impressive $336 billion as of the latest filings. This divestment in Apple follows a pattern, as Berkshire has gradually scaled back its holdings in the tech giant over the past two quarters.
Apple, under CEO Tim Cook’s leadership, has solidified its position through brand authority and pricing power. The company’s ecosystem, encompassing high-quality hardware, proprietary software, and integrated services, commands premium pricing and fosters customer loyalty. Notably, the majority of Apple’s iPhone sales are in the higher price brackets, above $800 per device, compared to a smaller fraction for competitors like Samsung, according to data from the International Data Corporation (IDC). Beyond smartphones, Apple has expanded its footprint in tablets, personal computers, wearables like the Apple Watch, and other consumer electronics, amassing a vast installed base exceeding 2.2 billion active devices globally.
A significant driver of Apple’s profitability lies in its services segment, which includes recurring revenue streams from iCloud storage, App Store transactions, subscription services like Apple Music and Apple TV+, and financial services such as Apple Pay. This segment not only outpaces hardware in revenue growth but also boasts higher profit margins, making it a critical growth engine for the company amid maturing smartphone markets and fluctuating hardware sales.
However, despite Apple’s strong market position and diversified revenue streams, Buffett’s decision to trim Berkshire’s stake reflects valuation concerns. Wall Street analysts anticipate Apple’s earnings per share (EPS) to grow at a modest rate of 10.6% annually over the next three to five years. Given Apple’s current price-to-earnings ratio (P/E) of 33.1, this results in a high price-to-earnings-to-growth (PEG) ratio of 3.1, significantly above its three-year average of 2.4. This premium valuation suggests that the market has priced in optimistic growth expectations, prompting Buffett to exercise caution and reallocate capital elsewhere.
On the other hand, Buffett’s confidence in Berkshire Hathaway’s intrinsic value has prompted substantial buybacks of its own stock. During Q1 2024 alone, Berkshire repurchased $2.6 billion worth of its shares, adding to a total of $9.2 billion in buybacks throughout 2023. This consistent buyback activity underscores Buffett’s belief that Berkshire’s stock is undervalued relative to its intrinsic worth, as determined by conservative estimates of its business operations and cash flows.
Berkshire Hathaway’s appeal as an investment lies not only in its disciplined capital allocation but also in its diverse portfolio of wholly owned subsidiaries spanning insurance (GEICO), freight rail transportation (BNSF Railway), utilities (MidAmerican Energy), and retail (including Dairy Queen and See’s Candies), among others. These businesses generate substantial cash flows, which Buffett has historically reinvested to achieve competitive returns and steadily increase Berkshire’s book value per share. Over the past decade, Berkshire’s book value has grown at an annual rate of 11.1%, surpassing the S&P 500’s average annual return of 10.9% during the same period.
Moreover, Berkshire Hathaway’s defensive characteristics have historically shielded it during market downturns, outperforming the S&P 500 index. This resilience is evident from Berkshire’s performance during significant bear markets, where it has often experienced milder declines compared to the broader market, as highlighted in historical data from Yardeni Research and Ycharts.
Buffett’s steadfast belief in Berkshire’s ability to deliver superior long-term returns relative to the S&P 500 underscores his commitment to shareholders’ interests and his conservative yet effective approach to value investing. By focusing on businesses with durable competitive advantages and strong cash generation capabilities, Buffett continues to navigate Berkshire Hathaway through economic cycles while seeking opportunities to enhance shareholder value through astute capital allocation decisions and strategic investments in undervalued assets like Berkshire’s own stock.
In conclusion, while Buffett’s reduction in Apple holdings reflects valuation concerns amidst high market expectations, his ongoing commitment to Berkshire Hathaway’s stock underscores his confidence in its intrinsic value and long-term growth prospects. This dual strategy exemplifies Buffett’s prudent stewardship of Berkshire’s vast resources and his unwavering adherence to the principles of value investing in today’s dynamic global markets.