The Oracle and the Apple
How Buffett’s Berkshire came to buy big tech stocks
Warren Buffett, the billionaire investor and a long-time critic of tech stocks, is now the proud owner of nearly 10 million shares of iPhone maker Apple.
Buffett’s Berkshire Hathaway emerged Monday as a big buyer of Apple stock. Buffett also added to his sizable stake in struggling IBM. And he said he’d be willing to use his cash hoard to help finance another investors’ bid for Yahoo.
Berkshire’s front man is still the billionaire investor, now 85. But change is afoot at the giant conglomerate, witnessed by a more aggressive move into areas of the market that Buffett once steered clear of — such as tech stocks — and increasing signs that decisions on what stocks to buy and sell appear to be shifting to investment lieutenants that Buffett himself brought in a few years back. Buffett’s Berkshire made big news Monday when it revealed in a regulatory filing that in the first quarter it had built a 9.8 million-share stake in iPhone maker Apple worth nearly $1.1 billion at the end of March. But as experts had theorized, and as Buffett confirmed to The
Wall Street Journal, the Apple buy was not the work of the Oracle of Omaha himself.
Instead, it was executed by one of the two ex-hedge fund managers he hired a few years ago who now manage a big
the Apple buy was not the work of the Oracle of Omaha himself.
Instead, it was executed by one of the two ex-hedge fund managers he hired a few years ago who now manage a big chunk of Berkshire’s stock portfolio.
Indeed, the Apple stock purchase was likely the brainchild of Todd Combs or Ted Weschler, the money managers Buffett brought in to pick stocks for the conglomerate when he’s gone. The addition of the two stock pickers is resulting in a broadening out of the types of stocks Berkshire invests in — and which ones are jettisoned. Buffett is better known for his own stock picks, which include iconic American companies such as Coca-Cola, American Express and IBM.
Though Buffett has repeatedly said he has no plans to quit, the fact that the new Apple position has the fingerprints of Combs or Weschler suggests that the transfer of responsibility on the stock picking side of the business is well underway.
“It continues the transition away from Buffett and the broadening of the portfolio away from areas of the market only Buffett is comfortable with,” says Jeff Matthews, general partner at hedge fund Ram Partners.
Buffett’s name also made headlines over the weekend and early Monday when he confirmed to CNBC that he would consider helping to finance Quicken Loans’ Dan Gilbert’s bid to buy Yahoo. But Buffett admitted that tech is still not his thing and that he would not buy stock in Yahoo.
“Yahoo is not the type of thing I’d ever be an equity partner in,” Buffett told CNBC. “I don’t know the business and wouldn’t know how to evaluate it, but if Dan needed financing, with proper terms and protec- tions, we would be a possible financing help.”
The biggest Buffett-chosen tech stock investment was IBM, which he bought in mass in 2011. His IBM stake at the end of the first quarter was $12.3 billion, according to regulatory filings. And despite being underwater on the investment by a sizable amount, Buffett defended his IBM holding at last month’s shareholder meeting and added slightly to his position in the just-completed first quarter by about 200,000 shares, according to SEC filings.
The influence of Combs and Weschler on Berkshire’s holdings were apparent when Buffett recently cited Combs’ stock investment and positive impression of aerospace parts maker Precision Castparts as a key reason why Buffett made Precision its biggest acquisition ever, a $37 billion deal which closed in January.
Still, while things are changing at Berkshire, the investment philosophy of buying established companies with staying power and top-flight management at good prices remains very much the same.
“Honestly, I don’t think (the Apple buy) signifies any dramatic change at Berkshire,” Matthews says.
“(Berkshire is) always looking for investments that they think make sense. And they think Apple makes sense,” he says.
What’s changing at Berkshire is the people making many of the buy-and-sell decisions.
“Buffett is getting less involved in investment decisions, but at the same time Berkshire is still looking for what they consider is good value,” says Vahan Janjigian, chief investment officer at Greenwich Wealth Management.
Building a stake in Apple is a sign the new blood at Berkshire is diversifying into parts of the market that Buffett once avoided.
“Tech has become such a big part of the economy that it would sound foolish to say I would never invest in tech,” Janjigian argues. The information technology sector now accounts for 19.8% of the S&P 500 and is the biggest of the 10 major sectors, according to S&P Dow Jones Indices. At the end of 2015, the weighting of Berkshire’s public tech stock holdings was around 10%, according to S&P Capital IQ.
And even though Apple is a tech stock, the investment still jibes with Berkshire’s time-tested investment philosophy.
The purchases follow a more than 30% drop in the price of Apple stock since its peak in February 2015.
Apple now trades at just 10 times earnings — well below the broad U.S. stock market valuation of 17 times earnings — and it’s not nearly as expensive as some other popular tech stocks selling at much higher P-Es. Apple also is a great brand with a strong management team.
The Apple purchase “does tell us that the people making many of the investment decisions at Berkshire are picking more modern and up-to-date names that are much more popular with everyone else,” Janjigian says.
“Buffett is getting less involved in investment decisions, but at the same time Berkshire is still looking for what they consider is good value.” Vahan Janjigian, Greenwich Wealth Management