Billionaire investor Warren Buffett's Berkshire Hathaway has taken a stake in Apple currently worth $900 million. David Craig for USA TODAY.
Today’s Berkshire Hathaway isn’t your grand-dad’s Berkshire.
Berkshire’s frontman is still billionaire investor Warren Buffett, now 85. But change is afoot at the giant conglomerate, witnessed by a more aggressive move into areas of the stock 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 brought in by Buffett himself 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 USA TODAY sources had theorized, and which Buffett confirmed to the Wall Street Journal via e-mail, the Apple buy was not the work of the Oracle of Omaha himself, but instead executed by one of the two ex-hedge fund managers he hired a few years ago that 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, of course, is better known for his own stock picks, which include iconic American companies such as Coca-Cola and American Express.
The fact that the new Apple position has the fingerprints of either Combs or Weschler all over it suggests that the transition away from everything Buffett is moving forward. Indeed, while Buffett has repeatedly said he loves his job and has no plans to quit, there are signs 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 and towards areas that Ted and Todd are comfortable with,” says Jeff Matthews, general partner at hedge fund Ram Partners and an author of Buffett-related books, including Pilgrimage to Warren Buffett’s Omaha.
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 take an equity stake 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 protections, we would be a possible financing help."
The biggest Buffett-chosen tech stock investment was IBM, which he bought in mass back in 2011. His IBM stake at the end of the third-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 at Berkshire.
“Honestly, I don’t think (the Apple buy) signifies any dramatic change at Berkshire,” says Matthews. “(Berkshire is) always looking for investments that they think make sense. And they think Apple makes sense. Don’t forget Apple is a great consumer products company with a great business model and strong franchise that’s trading at an attractive valuation.”
What’s changing at Berkshire is the people making many of the buy-and-sell decisions.
“The big takeaway is 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 and author of Even Buffett Isn’t Perfect: What You Can – and Can’t – Learn from the World’s Greatest Investor.
Apple, Janjigian says, is “not Buffett’s kind of investment,” adding that the billionaire investor has “famously” avoided tech stocks in the past.
Building a stake in Apple, however, 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 19.79% 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 the Berkshire’s time-tested investment philosophy.
The Apple stock purchases, for example, follows a more than 30% drop in the price of Apple’s shares since its post-split peak of $133 per share on Feb. 23, 2015. It comes at a time when the iPhone maker is selling at a cheap valuation. Apple is also a great brand with a strong management team. With Apple now trading at just 10 times earnings – well below the broad U.S. stock market valuation of 17 times earnings – it’s not nearly as expensive as some other popular tech stocks selling at outrageous prices relative to earnings.
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 explains. “But these are not companies like Tesla or Amazon which you could make the case are tremendously overvalued. They’re still looking for investments that show value and that they can buy at a cheap price.”
Apple wasn’t the only stock moves Buffett cited in its regulatory filing. Berkshire added to its investment in IBM, which is also trading at an attractive P-E multiple, despite falling about 14% since hitting a 52-week high in May 2015. On IBM, which has consistently bought back its own shares in recent years, and has a well-known brand and CEO that Buffett backs, “Buffett is staying true to his word,” says Robert R. Johnson, president and CEO at The American College of Financial Services. Despite IBM’s poor performance, Buffett told CNBC recently that “we feel fine (about IBM) or we won't own it. I think I can safely say we would be much more likely to buy more in the next 12 to 24 months than we would be to sell shares."
Johnson also had this to say about Berkshire’s other moves:
On selling all of its remaining AT&T stake: “The latest moves are a continuation of recent moves of paring of holdings of AT&T. Likely simply a sale because there were other, more attractive stocks to purchase like Apple and Phillips 66.”
On dumping nearly all of its shares of consumer products maker Procter & Gamble: “It is a terrific company, and has many wonderful brand names, but I believe the valuation over 27 times earnings was simply too rich and the Berkshire team could put that capital to better use in some undervalued companies.”
On reducing its Walmart stake by nearly 950,000 shares to 55.2 million shares. “Walmart’s business model is under pressure. Growth is slowing -- particularly same store sales. There also is pressure to raise employee pay, as Walmart has a very unhappy and increasingly unstable worker base when compared to competitors such as Costco. The WMT model could come under increased pressure as minimum wages rise across the U.S.”
