At Berkshire Hathaway’s annual shareholder meeting this past weekend, it was revealed that Warren Buffett has been selling off his stake in Apple (AAPL). According to Berkshire’s latest 13F filing, the conglomerate sold off over 50 million shares of AAPL in the fourth quarter of 2023, reducing its position by nearly 25%. This comes as a surprise to many, given Buffett’s long history of praising Apple and his general buy-and-hold investing philosophy.
Why is Buffett Selling?
So why the change of heart on Apple from the Oracle of Omaha? Buffett didn’t provide a detailed explanation, but he did note that the sales were not driven by any negative views on Apple’s business or future prospects. Instead, he indicated the sales were done to free up cash for other potential investments. “It’s an extraordinary business,” Buffett said of Apple at the meeting. “But we own $140 billion worth probably now, and it would be very nice to own more but it doesn’t quite make it at current prices.”
The Validea Buffett Model Still Likes AAPL
Interestingly, while Buffett himself may be taking some chips off the table, a quantitative model we created based on his approach says Apple’s stock is still very attractive. The model, which is based on the book “Buffettology” written by Buffett’s former daughter-in-law Mary Buffett, gives AAPL a perfect 100% score, putting it squarely in “Buffett buy” territory.
Breaking Down the Buffett Model
So what goes into our Buffett-inspired model? Here’s a look at how AAPL scores on the key criteria:
Earnings Predictability: The model looks for companies whose earnings have increased in at least 9 of the past 10 years. AAPL passes this test easily.
Debt: Buffett is conservative when it comes to debt. The model looks for companies that could pay off their debt within 5 years based on current earnings. AAPL could pay off its debt in less than 2 years – an exceptional level according to the model.
Return on Equity: The model looks for 10-year average ROE of at least 15%, and ROE of at least 15% in 9 of past 10 years. AAPL’s 10-year ROE is a whopping 83.6%, and it has topped 15% in all of past 10 years.
Return on Total Capital: This is another key profitability metric. The model looks for a 10-year average of at least 12%. AAPL’s 36.9% far exceeds that.
Free Cash Flow: The model looks for positive free cash flow, to avoid firms that need to continually pour money into their businesses. AAPL’s $5.35 free cash flow per share is a good sign.
Use of Retained Earnings: This measures how well the firm has used the earnings it has reinvested in its business. AAPL has a 15.9% return on retained earnings over past decade, which the model considers exceptional.
Initial Rate of Return: This measures how a stock’s earnings yield compares to the long-term Treasury yield. AAPL’s 3.78% earnings yield is right in line with the 10-year Treasury yield, a good sign.
Intrinsic Value: The model projects a company’s earnings 10 years into the future and then uses that to determine an estimate of the stock’s intrinsic value. It then compares that to the current stock price to determine if there is a margin of safety. Based on projected EPS of $724.11 a decade from now and a projected P/E of 26.4, the model estimates AAPL to have a significant margin of safety.
Expected Annual Return: The model also calculates the expected annual return of a stock based on the earnings yield and projected EPS and P/E ratios. For AAPL, it estimates that an investor could expect a 60.4% annual return over the next decade if they bought at the current price – an exceptional expected return.
Why the Discrepancy with Buffett?
Given the model’s take on Apple, why might Buffett be selling? A few potential reasons:
- As noted above, Buffett said the sales are not an indictment of Apple itself but rather are aimed at raising cash for other potential investments. With Berkshire sitting on a huge cash pile already, the Apple sales may indicate Buffett sees some very attractive potential opportunities that he wants to free up funds for.
- Buffett isn’t a quant investor. Although our model shows that the stock meets all of his fundamental tests, he obviously also uses qualitative criteria in his evaluation.
- Apple is Buffett’s largest position by far. Prudent risk management would dictate that it makes sense to sell the stock, even if he still likes it.
The Bottom Line
Buffett’s sales of Apple stock are certainly noteworthy, but investors may not want to read too much into them. Remember, Buffett isn’t totally exiting the position; he still owns well over $100 billion worth of Apple stock, and he continues to praise the company’s business and long-term prospects. Most importantly, he hasn’t given any indication that the stock fails to live up to his core investment criteria. In fact, based on our model, it continues to excel on those high-level fundamental tests that have been critical to Buffett’s tremendously successful approach for many decades.
While Buffett may be raising some cash for other opportunities, individual investors with a long-term focus may still want to keep Apple high on their watch lists.
Further Research
