Warren Buffett, the Oracle of Omaha, may be souring on the prospects for Apple (AAPL) and technology stocks, traders tell Newsmax. Others, however, think he may have just been taking profits off the table and looking to diversify Berkshire Hathaway’s portfolio.
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The big news in Berkshire’s second quarter financial report Saturday was a nearly 50% reduction in the size of the investment firm’s Apple stake to about 400 million shares. Some traders also sounded concerns that with this sale, Berkshire’s cash stockpile rose to $277 billion as of June 30, up significantly from $88 billion on March 31.
1.) Apple Headwinds
Apple has been facing slower revenue growth and a high valuation compared to other tech giants and, like other U.S. companies heavily dependent on China, is getting hammered by an economic slowdown there.
“The single most important decision in evaluating a business is pricing power,” says Stephen McBride, chief analyst at RiskHedge. “Buffett knows the trend of Apple squeezing more revenue growth by hiking the price of iPhones is near the end. Will people really pay one month’s rent for the latest iPhone?”
Apple revenues “have barely grown in two years,” McBride says.
Nigel Green, CEO of deVere Group, adds: “Tech is trading high, but Buffett buys what he understands and sells what he doesn’t. He doesn’t ‘get’ AI (artificial intelligence).”
2.) Taking Profits
Stocks are trading at an average price-to-equity ratio of 21, above the 20-year moving P/E average of 16, according to FactSet.
“I would be getting a little worried,” says Jim Shanahan, an Edward Jones analyst who has a Hold rating on the stock. “Warren Buffett is reporting some massive sales that have continued into the third quarter.”
McBride, on the other hand, thinks Buffett may just be taking some profits off the table.
“Buffett is up 900% on his original investments in Apple,” McBride notes. “It’s his biggest winner ever in dollar terms. Buffett is simply taking some risk off the table. Nobody ever went broke taking profits.”
3.) Market Conditions Weakening
Traders point out that Berkshire was a buyer of just $1.6 billion of stocks in the second quarter and that Buffett says he’s finding it challenging to spot fairly priced investments.
As Buffett put it himself at Berkshire’s annual meeting in May: “We’d love to spend it (cash), but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.”
Reading further into this, Green says, “It’s also likely Buffett believes a recession is on the horizon — meaning people will be spending less on nonessentials; that the Chinese market is slow, and the country is becoming increasingly isolationist, especially in terms of tech.”
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4.) Tax Optimization
With corporate taxes currently at an historically low 21%, it is possible that the Berkshire CEO and chair simply wants to realize gains before potential future increase in the tax rate. The Biden administration has proposed raising the corporate tax rate to 28%.
5.) Diversification
Apple has contributed an increasingly higher portion of Berkshire’s portfolio returns. Reducing the stake helps diversify the firm's investments and risk of having too much capital tied up in a single company.
“Apple had become a giant part of Berkshire’s portfolio,” McBride says. “It could have become a ‘tail-wagging-the-dog’ scenario.”
Still, even after unloading the Apple stock, at $84 billion of Berkshire’s portfolio, it’s still Berkshire’s largest holding, representing 47% of its total stock holdings.
As Green puts it, “Yes, Buffett sold 50% of AAPL, but he kept 50%, too.”