Warren Buffet’s Apple masterstroke – MyBroadband

In this column, Ranmore Fund Management‘s Sean Peche analyses the timing and execution of Warren Buffett’s sale of the majority of his stake in Apple. Buffett‘s rationale, partly driven by tax considerations and Apple’s high PE ratio, reflects his value investing principles.

I’m scoring the Oracle of Omaha — and his trader — 10/10 for the timing and execution of their Apple sale.

He played it down a little at the AGM in May when questioned about his Q1 sale of 115 million Apple shares.

But meanwhile, his trader was working flat out to sell half his remaining stake.

Bloomberg data tells me 4.4 billion Apple shares traded in Q2, so Berkshire’s sale of 394 million means he was 9% of the volume — that’s big!

And since another 1.6 billion Apple shares have traded so far this quarter, the average price is 19% higher ($222 vs. $186).

I wouldn’t be surprised if they sold another 141 million shares…

But Warren Buffett said at the AGM that he expected Apple to remain Berkshire’s largest stock investment!

Yes, but he did caveat that with “unless something extraordinary happens”.

And this AI frenzy feels “extraordinary”.

He also said selling made sense because the 21% Federal Tax rate on the gains would probably increase, meaning he’d rather lock in his gains at a known 21% than risk having all historic gains taxed at a potentially higher CGT rate – all those living in the UK may want to take note…

But his reasoning may be more than just taxes.

Berkshire is also sitting on massive unrealised gains of ~$57bn on their Amex and Coca-Cola stakes.

And he hasn’t sold those.

Maybe it’s because AXP and KO are still growing revenue and trade on lower multiples.

What do you mean?

Look, Warren Buffett is a value investor.

This means he’s sensitive to price.

And Apple is priced at 30x historic earnings.

The problem is revenue hasn’t grown over the past year, and EBITDA margins of 34% are the highest in 9 years.

It’s one thing to have a high price-earnings ratio (PE) on low earnings that can grow.

But Apple has a high PE on high earnings, which will fall if Google stops paying $20bn to be the default search engine.

People forget that many Value investors (like us) also want growing companies.

We just don’t want to pay any price for that growth, so there is a price at which we sell.

Apple has reached the price at which Mr Buffett is a seller.

But I thought his “favourite holding period is forever”?

Yes, but he said, “favourite”.

He didn’t say, “Our only holding period is forever”.

And he also said, “Be greedy when others are fearful and fearful when others are greedy.”

And in the past few weeks ago, we’ve learned that:

• Inflows into US Large cap funds of $280bn this year are on track for the 2nd largest on record;
• US Equity Index futures traders had never been longer at $300bn, and;
• We have a $9bn 3x leveraged semiconductor product that attracted $2.8bn of new money in July.

And is down 60% in four weeks!

All of which strike me as signs of investors being “greedy”.

So, it’s entirely right for him to be “fearful”.

He’s simply doing what he told us to do many moons ago… to anyone who’s listening.

Well done Mr Buffett – 10/10.

You’re the Value Investing GrandMaster.

Everyone else, “Please try harder”.

Column by Sean Peche, Portfolio Manager at Ranmore Fund Management Ltd.

Disclosure:

• Ranmore Global Equity Fund holds 0% of the companies mentioned.
• The content of this marketing material is provided for information purposes only and is not advice.
• Past performance is no guarantee of future performance.

Disclaimer:

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This article was republished on BizNews from LinkedIn and is reproduced with permission.