Why Warren Buffett Snapped Up Apple Stock (AAPL)
At an age when most men live off their investments, Warren Buffett lives for them. And he's taking some big gambles of late. Consider his $37.2 billion purchase of Precision Castparts Corp. last August: It marked the biggest deal of his career -- and came just in time for his 85th birthday,
Now, he's just scooped up $1 billion worth of stock in Apple (AAPL). So could it be that Buffett -- who hasn't been fond of high-tech in the past -- has once again signaled his willingness to take a big chance? Granted, this is chump change for a guy whose net worth surpasses $63 billion. If he spent $100 a second, he'd have to live another 20 years to blow through all that dough.
But there's no denying that at this point, the Oracle of Omaha loves the thrill of the chase -- even if it remains to be seen if Buffett landed a sweet stock treat, or merely a fruitless investment.
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Either way, AAPL now falls into the market basket of a man who's arguably the savviest stock shopper of all time.
"Who dares to judge an investor who has returned his shareholders 1,826,163 percent in the 50-year period from 1965 to 2014?" says K.C. Ma, director of the Roland George Investments Institute at Stetson University in DeLand, Florida. That's an annual return of better than 21 percent, which is more than twice as much as the Standard & Poor's 500 index in the same period.
"While it might seem that his investment in Apple was uncharacteristic of him, he did so with the same qualifying factors that led to him to invest in IBM (IBM)," says Steve Gormley, founder of Seventh Point, a California-based private equity fund. "Apple has a low price-to-earnings ratio, high dividend yield and a strong share repurchase program."
Investing in Apple could even be justified by the simplest of variables: its appellation.
"Like Coca-Cola (KO), American Express (AXP) or Wells Fargo (WFC), it has a well-known and well-regarded premium brand name," says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. "The Apple name and logo are ubiquitous around the globe. In fact, in many surveys it is lauded as the world's most valuable brand."
But even a stock market swami can miss a few now and then -- as Buffett did with McDonald's Corp. (MCD). After he sold off his holdings in 1998, the stock took off faster than a hungry miscreant trying to ditch his bill at the drive-thru.
Buffett got out of MCD in 1998, and if he had followed his own gospel of long-term buy and hold, he'd have realized a return of more than 300 percent. Then again, McDonald's stacked the meat a mile high between 1980 and 1998, shooting up more than 30 times its former price of about $1 per share. (Today, MCD trades just shy of $123, which makes for one heckuva a Happy Meal.)
As for his billion-dollar bite of Apple, "Buffett is late to the game," says Jordan Kimmel, managing member with FACTS Asset Management in New York. "It's now a mature company, too big to make aggressive moves, and is no longer a growth stock."
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Meanwhile, there's at least one other billionaire who got out of the game: Carl Icahn. A spring chicken compared to Buffett, the 80-year-old exited Apple stock in April, citing the threat of overreaching by the Chinese government. But at least Icahn made an estimated $2 billion on AAPL. And on getting out, Icahn acknowledged that Apple still represented a good value.
So the billionaire baton passes on to Buffett, who ranks as the supreme embodiment of a value investor. But ...
"Bekrshire's purchase of Apple shares is bizarre," says Barry Randall, technology portfolio manager on Covestor, a Boston-based online investing company. "It's strange, for example, that Apple has so many attributes that aren't particularly value-oriented -- like its increasing long-term debt load, which has quadrupled from $17 billion in September 2013 to $68 billion as of the end of March 2016."
Over that same time period, though, Apple's market capitalization grew from $453 billion to $590 billion -- a nice, fat increase of 30 percent. Now here's where the gain game gets confusing: That cap is nowhere near the $732 billion the company boasted this time last year. That makes for a precipitous drop over the last 12 months of 28 percent, to the current market cap of $526 billion.
That also equals a value hemorrhage of some $206 billion -- which is enough buy Twitter (TWTR). Nineteen times over.
Yet Buffett has famously stated, "When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household." So it's a safe bet Buffett's buy aligns with Berkshire Hathaway's (BRK.A, BRK.B) philosophy of value investing -- even if it means trading in traditional burgers for a high-tech Apple.
"My conclusion is that Buffett's investment team is re-defining the term 'value stock' as it applies to technology companies," Randall says. "But for this approach to succeed, Buffett will have to somehow re-define Apple's $68 billion in long-term debt. And the re-definition of debt usually only occurs in bankruptcy."
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Kimmel goes a step further: "While people like to follow Buffett, investors can do better."
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