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Warren Buffett was in the news this week after a recent 13-F filing with the SEC revealed Berkshire Hathaway (NYSE: BRK-B) bought $1 billion worth of Apple (NASDAQ: AAPL) shares last quarter. Apple stock jumped 4% on the news.
When the Oracle of Omaha makes a move, investors listen. Buffett doesn’t usually invest in the technology sector, but there’s plenty of reasons for him to make the Apple bet right now.
Is Apple Bet a Change in Course?
For years, Warren Buffett professed a deep reluctance to invest in technology stocks. Buffett has always been a proponent of the “own what you know” strategy. He prefers to invest in stable companies with wide economic moats—or in other words, sustainable competitive advantages.
Technology doesn’t seem to fit that mold, because tech companies are at times volatile, and have business models that can seem difficult to understand.
Buffett’s huge investment in Apple stock could come as a shock, because the legendary investor has been vocal in the past about only investing in businesses that are easy to understand. For that reason, he has historically shied away from investing in technology companies, which are often more speculative and volatile than his core investments like Coca-Cola (NYSE: KO) and Kraft Heinz (NYSE: KHC).
As a result it could seem like with the Apple bet, Buffett is changing his investment strategy.
But when looking closer, it makes more sense. Apple’s business model is not difficult to understand, and its financial statements are fairly easy to comprehend. Moreover, Apple has become as much of a consumer-oriented company than almost anything else.
Plus, Warren Buffett is no stranger to tech stocks; in fact, one of Berkshire’s biggest holdings is International Business Machines (NYSE: IBM). Last quarter, Berkshire added another 198,000 shares of IBM, for a total investment of 81.2 million shares. Berkshire’s stake in IBM is worth approximately $12.3 billion, so it is clear that Warren Buffett has set a precedent of significant investment in the sector.
Take a Bite Out of Apple
Whether investors should follow Berkshire’s lead into Apple is a different question. First, it’s worth noting that while $1 billion is surely a huge sum of money, Berkshire is only taking a small bite out of Apple. The $1 billion investment is a relative drop in the bucket. Berkshire owns $25 billion worth of Kraft Heinz, and $18 billion worth of Coca-Cola.
But it’s clear why Warren Buffett, perhaps the most famous value investor of all time, would like Apple.
Apple is a tremendous value opportunity because the stock is very cheap. Apple is expected to grow earnings per share to $9.92 next year, which means the stock is valued at approximately 11.5 times forward earnings for the company. This is significantly below the broader market valuation as indicated by the S&P 500. From a valuation perspective, the stock is attractive.
Furthermore, Warren Buffett loves margins of safety, and Apple’s tremendous balance sheet definitely qualifies as a margin of safety. The company ended last quarter with $232 billion in cash, short-term investments, and long-term marketable securities on its balance sheet, and just $69 billion in long-term debt.
Its tremendous balance sheet allows the company to create a great deal of value for shareholders through its capital allocation program. In April, Apple announced both a 10% dividend increase, and also added $35 billion to its stock buyback program. In all, the company will raise its total shareholder capital allocation by $50 billion.
Apple now expects to spend a total of $250 billion under its current capital return program, which will conclude at the end of March 2018. The stock provides a 2.25% dividend yield, meaning it should be attractive not just for value investors, but for income investors as well.
Investors have plenty of reason to follow the Oracle of Omaha on this one. Based on Apple’s cheap valuation and massive cash hoard, this seems to be a great buying opportunity.
DISCLOSURE: Bob Ciura personally owns share of Apple and IBM.
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