If you are Mr. Joe Schmoe investor, you probably like to keep a close eye on what Warren Buffet, the Oracle of Omaha, owns a piece of in his investment portfolio. After all, there’s no way anyone with more than a couple of brain cells could possibly deny the absolutely amazing work that Buffet has done during his time serving as the CEO of Berkshire Hathaway and compounding capital at high rates for decades. Why wouldn’t you keep an eye on this guy? He’s a natural at picking winners. And as investors you want winners, baby.
According to The Motley Fool, there are dozens of stock that make up Berkshire’s huge — no, that word isn’t adequate — more like ginormous $369 billion portfolio, but one in particular makes up a stunning 41.4 percent of it and that is Apple. It’s their single largest holding. The FAANG stock has increased by 542 percent since the beginning of 2016, which was right about the time when Buffet started snapping up pieces of the business.
So what was it about Apple that caught The Oracle’s eye?
Even in early 2016, Apple had one of the world’s strongest brands, boosted by its lineup of incredibly popular hardware products. This gave the company pricing power. Consumers want to continue paying up for new devices. Buffett appreciates businesses that can consistently ask their customers to pay more without hurting demand. Another top Berkshire holding is Coca-Cola, which certainly fits this category.
Apple is a financial powerhouse. In fiscal 2015, the business posted an operating margin of 30%. And it generated $70 billion of free cash flow (FCF) that year. This type of profitability continues today. Apple produced $100 billion of FCF in fiscal 2023. Management used this windfall to pay $15 billion in dividends and to repurchase $83 billion worth of outstanding stock.
In addition to strong financial performance, valuation is another top factor that Buffett looks at. During the first three months of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6. Given some of the sky-high valuations in the market today, this was an absolute steal for such a dominant company. Buffett took full advantage of the buying opportunity.
You’re probably wondering if you should follow Buffet’s lead and snap up some stocks of Apple yourself, seeing as how it’s paid off in a big way for The Oracle of Omaha. However, just because it worked well for him, doesn’t guarantee you’ll have the same results.
One big issue with buying Apple stock at this current moment is that it is extremely expensive, which is due to the extremely impressive performance the company has had over the years. Shares of the tech company are currently being traded at a P/E ratio of 26.3. And believe it or not, this has come down from 32.3, which is where it was sitting just four months ago. However, it still costs a healthy chunk of change.
The reason for the drop is due to what The Motley Fool says is a decrease in growth potential, as the company is far more mature today.
In fact, the business saw its sales decline slightly in fiscal 2023. And over the next three years, Wall Street analysts expect revenue and earnings per share to rise at annualized clips of 4.4% and 8.3%, respectively. Paying such a high valuation multiple doesn’t seem like a smart move considering these weak forecasts.
We can’t read his mind. However, I suspect Buffett still owns the stock because he doesn’t want to trigger a taxable event. Or maybe he simply wouldn’t know what to do with all the cash, a problem that Berkshire has already been dealing with. Apple has been a huge winner historically. But based on where things stand today, it’s best to pass on the stock.
You heard it from the experts, folks. Now is not the time to buy stock in Apple, despite the fact that it makes up the vast majority of Buffet’s portfolio.