Apple’s (NASDAQ: AAPL) stock recently took a slight dip of 0.50% because Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) decided to trim its flagship position in the tech giant. The company sold approximately 1.09% of its Apple shares, which translates to a staggering 10 million shares. This transaction alone is valued at around $1.8 billion.
Buffett still has a hefty 5.9% stake in the iPhone maker worth about $167 billion, but this move still came as a surprise since Buffett praised Apple at Berkshire’s annual meeting last year, and even went as far as saying that Apple was a better business than any they owned.
At the same meeting, he admitted that an earlier cut to Berkshire’s Apple holdings was a mistake, so what pushed Berkshire Hathaway pare its stake in Apple now?
A Long Time Coming
If you’ve been following Berkshire Hathaway for a while, then maybe this sale isn’t that surprising. After all, Apple accounted for around 50% of Berkshire’s $350 billion stock portfolio. As Apple shares were pushed higher and higher by the tailwinds of the tech industry, many investors who follow Berkshire have wondered how much bigger Buffett and his deputies would allow the position to grow. But its worth noting that Berkshire didn’t just sell Apple. It also sold 32%, or around 30 million shares, of its stake in media company Paramount Global (NASDAQ: PARA), and 78% of its share in printer and PC maker HP (NYSE: HPQ).
Why Berkshire Sold…
It’s possible that Berkshire took advantage of Apple’s current valuation to profit from its position. Currently, AAPL stock trades at 28 times expected earnings, compared to the sector median of 22.27. That wouldn’t be a ridiculously high forward-earnings multiple if the company was delivering stellar growth, but Apple isn’t doing that right now.
Looking at Apple’s 2024 Q1 results, which ended on December 30th 2023, it reported year-over-year revenue growth of just 2%. Apple will likely continue to grow, but there’s no compelling reason to expect Apple to return to significant growth any time soon. In fact, AAPL stock hasn’t kept pace with some of its big tech peers in recent months, even losing the title of most valuable US company to Microsoft (NASDAQ: MSFT) earlier this year.
The company faces weakness and declining sales in the Chinese market, which accounts for 20% of its revenues. With strong competition from local smartphone manufacturers in China like Huawei Technologies and Xiaomi (OTCMKTS: XIACF), Apple even had to offer discounts in China on its newest iPhone models in January. China has also ordered government officials to stop using Apple’s devices at work and stop bringing them into their offices as a response to US sanctions on China.
Despite these headwinds, the company is betting that it can reinvigorate growth with its VR/AR headset, the Vision Pro. However, the market for this technology is still developing and will likely not be the catalyst Apple’s management hopes for.
Not only is the market for these headsets still relatively small, but the Vision Pro also comes with a staggering price tag of $3,500. In contract, META’s (NASDAQ: META) Quest headset can cost between $400-$3,500, depending on its specifications. While the headset is an exciting new product, buying one for $3,500 isn’t exactly the same as buying a $1,000 phone which you’ll use for everything in your daily life.
Landing an Elephant
On the other hand, its possible that Berkshire sold these shares of APPL stock to have the cash on hand for an acquisition. Buffett is known for “landing elephants”, which is his term for making a big acquisition. While Berkshire has around $157 billion in cash at the moment, the extra liquidity from selling these shares of APPL stock could be used for any potential acquisitions Berkshire has been eyeing.
Portfolio Redistribution?
It also seems likely that this sell off was part of Berkshire’s larger plans for portfolio redistribution. With over 50% of its stock portfolio allocated to Apple, its not surprising that Berkshire may redistribute or look for opportunities elsewhere. However, Buffett is not a huge advocate for diverstification, having said that “Diversification is protection against ignorance”. He went on to say that, “If you understand the business, you don’t need to own very many of them.”
Buffett undoubtedly understands Apple’s business, and since he is not afraid of allocating an outsize portion of Berkshire’s portfolio to one great business, it stands to reason that something has either changed within Apple’s business or Berkshire’s outlook for Apple has changed.
What Berkshire Bought Instead
In either case, Berkshire saw fit to buy shares in other companies while it pared back its stake in Apple. During this same period, Berkshire increased its positions in Chevron Corporation (NYSE: CVX) and Occidental Petroleum (NYSE: OXY) – both oil and gas companies.
Last year was filled with challenges for the oil and gas sector. Oil prices fluctuated due to the economic slowdown in China – the world’s largest oil importer – as well as geopolitical tensions in the Middle East and contractionary monetary policies across multiple countries.
But the outlook for oil and gas stocks in 2024 has improved. Demand for oil could grow as central banks are expected to shift to expansionary policies triggering global growth. OPEC is also supporting oil prices through production cuts, which may explain why Buffett is bullish on oil and gas stocks right now.
OXY Stock
Over the first five days of February, Berkshire bought 4.31 million shares of OXY stock in three transactions, totaling $245 million. This raised its stake in OXY stock to 28%, making it the company’s largest shareholder. Given how much Buffett values strong leadership, its not surprising that he recently praised the company’s CEO Vicki Hollub, calling her “an extraordinary manager of Occidental” during Berkshire’s annual meeting in May 2023.
Occidental is also emerging as a strong player in the carbon capture space, which is expected to grow at 24% CAGR reaching $12.9 billion by 2030. The company is building a direct air capture facility in Texas that “is expected to be the largest DAC facility in the world, with the capacity to capture 500,000 tons of atmospheric CO2 per year when commercial operations begin in mid-2025.”
CVX Stock
As for Chevron, the company is the fifth-largest holding in Berkshire Hathaway’s stock portfolio. It saw better than expected Q4 results and it appears that CVX stock could be on track to close the performance gap with the sector ETF, the Energy Select Sector SPDR Fund ETF (NYSEARCA: XLE).
Chevron has also forecast 2024 production to increase again, this time by 4% to 7% as it increases its investments in renewable energy and carbon capture. Additionally, analysts expect CVX stock to deliver total returns of 20%-30% in 2024, if oil trends higher.
Thanks to its healthy balance sheet and operating cash flow, Chevron has maintaned its dividends with a yield of 4.33%. Its stong financial position has also helped it make aggressive investments in exploration activities and acquisitions.
The Bottom Line
While these oil and gas companies have caught the attention of Berkshire Hathaway thanks to their strong fundamentals, it does not mean that investors should blindly invest in them. Many investors study Berkshire’s filings to get an inkling of what Buffett is thinking, and while that can be a useful tool, its still important to do your own due diligence.
Berkshire’s decision to sell 10 million shares of APPL stock is noteworthy, but its important to remember that this transaction amounted to only 1.09% of its total position in Apple. Its also possible that the decision to sell came from portfolio managers Ted Weschler and Todd Combs, which could mean that Buffett was not involved in the sale.
Even if that is the case, investors should be aware of the challenges Apple faces in the Chinese market. As impressive as the Vision Pro may be, it already faces competition from Microsoft and demand for the headset may take time to develop. In light of this, investors should watch how Apple grapples with these headwinds.
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