Warren Buffett’s move to sell almost half of Berkshire Hathaway’s enormous stake in Apple during the second quarter is as surprising as it is hard to explain.
Apple remains Berkshire’s largest equity holding with a market value of $86.4 billion, although it now accounts for around 28% of the portfolio, down from 44%.
The Apple sales accounted for almost all of Berkshire’s net equity sales of $75.5 billion between April and June. It’s the seventh straight quarter of net selling.
All that selling, and lack of buying, pushed Berkshire’s cash to $277 billion as of June 30.
And so far in the third quarter, Berkshire has disposed of 8.8% of its sizable Bank of America holding, generating around $3.8 billion, over 12 consecutive trading days. (There have been no reported sales since August 1.)
While Buffett has made it clear that it is a mistake to think that Berkshire never sells stocks, he has a well-earned reputation as a long-term investor and has said his favorite holding period is “forever.”
Here are some of the explanations being offered to explain the uncharacteristically large Apple sales.
It’s a “wake-up call” that Buffett sees trouble ahead for the economy and the stock market
Edward Jones analyst James Shanahan told CNBC.com’s Yun Li, “This looks alarming because you have a large and sophisticated investor with a really impressive long-term track record not putting any of his cash to work to buy stocks, and in fact, is massively liquidating.”
On CNBC’s “Worldwide Exchange” Monday, R360’s Barbara Goodstein said, “These look like seismic shifts, and he could be betting on a recession.”
Investor’s Business Daily quotes Glenview Trust’s Bill Stone as saying Buffett’s “war chest” of cash will allow Berkshire to “seize the initiative when the time comes.”
A counter argument is that Buffett has repeatedly said he doesn’t try to predict what the stock market and the economy will do in the future and buys and sells primarily on fundamentals.
While many Apple analysts remain bullish on the stock despite Berkshire’s sales, Maxim Group’s Tom Forte told “Squawk on the Street” he thinks Buffett’s moves “make a lot of sense” because investors are too enthusiastic about the company’s AI prospects.
The Apple position had gotten too big
Duetsche Bank’s Jim Reid wrote in a note, “It’s still Warren Buffett’s single largest position so it’s possible this will just be seen as risk management.”
“To think that our criteria for Apple is different than the other businesses we own — it just happens to be a better business than any we own. And we put a fair amount of money into it, but we haven’t got more money in it than we’ve got in the railroad [BNSF].”
Tax considerations
At this year’s annual meeting, Buffett suggested he was thinking about taxes when Berkshire sold during the first quarter. He said he expects capital gains tax rates will be heading higher, so shareholders won’t mind paying a lower rate now on the “little” Apple sale rather than a higher rate later.
That explanation for the second quarter sales, however, feels like a stretch, given their large size.
Munger’s death is a factor
Shanahan also notes to IBDthat most of Berkshire’s Apple sales followed Charlie Munger’s death last November. “I wonder, perhaps, if Charlie Munger liked Apple stock more, or was more comfortable with the earnings outlook for Apple, than Warren Buffett is.”
At the 2021 meeting, Buffett admitted that reducing Berkshire’s Apple position by 8% in the second half of 2020 was “probably a mistake.”
He added, “Charlie, in his usual low-key way, let me know” that he thought it was a mistake.
Correction: In last week’s newsletter, the market value of Berkshire’s Apple stake should have been $173.6 billion, not $173.6 million. (It’s a lot smaller this week, but still not that small.)
