Why Warren Buffett Might Buy Apple Shares
Sammy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone who follows the stock market knows that shares of Apple (NASDAQ: AAPL) have been under heavy selling pressure over the past few months. Despite the fact that Warren Buffett does not usually take stakes in technology companies, I believe there are reasons why Buffett could be a buyer of AAPL at current levels.
Buffett doesn't usually buy tech stocks
Throughout his investing career, Warren Buffett, chairman & CEO of Berkshire Hathaway (NYSE: BRK-B), has avoided investing in most technology companies. To Buffett, investing in technology companies is problematic for a few reasons. Firstly, Buffett likes to invests in what he understands, companies such as Coca-Cola, Wells Fargo, American Express, and Procter & Gamble are a few of his favorites. Given the fact the Buffett does not even have a computer in his office, let alone a smartphone or tablet computer it is almost impossible for Buffett to understand technology companies such as Google, Apple, Amazon, and many other household tech companies. This lack of understanding has led to Buffett missing some of the best investment opportunities of the past twenty years. In addition to lacking a fundamental understanding of many technology companies, Buffett has also said that he does not know how to value technology companies such as Facebook.
The exception to the rule: IBM
As discussed above, in general Buffett does not invest in technology companies. However, there is always an exception to the rule in this case IBM (NYSE: IBM). Since initiating a stake in late 2011, Buffett has bought enough IBM so that it is now Berkshire's third largest holding behind Coca Cola and Wells Fargo. Here's Buffett's comments on the IBM stake:
IBM has done an incredible job executing its long-term strategy, has an excellent road map for the future, and respects its shareholders by being honest with them and doing big stock buybacks. They've done all kinds of things right.
To this point, I think it is fair to say the Apple has done a less than stellar job of respecting shareholders by being honest with them and doing big stock buybacks. While Apple did recently initiate a stock buyback and dividend program, these moves have been very conservative given Apple's cash hoard. CNBC's Jim Cramer put it best:
Apple's management needs to realize what everyone else has: that it's a regular public company like any other, especially since the death of its founder, Steve Jobs. And until it either stops being public or trades through its cash, management is going to have do a much better job of explaining itself.
In a recent piece entitled Why Apple Should Announce A $100 Billion Stock Buyback, I argued that Apple should be doing more for shareholders. While a $100 billion buyback would be nice, I doubt we will get it anytime soon. That being said, even a smaller buyback program would help change the narrative surrounding Apple and its poor management of shareholder cash. A healthy buyback program would likely make Buffett an interested buyer.
Apple's competitive moat
Warren Buffett often says that he likes to invest in companies that have a wide moat, meaning a competitive advantage over other companies. Buffett said of IBM:
It's a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms, or change IT support. There is a lot of continuity to it.
Buffett is arguing that IBM has a moat because it is difficult for companies to switch to other service providers. Like IBM, I also believe that Apple has something of a moat in the form of the Apple Ecosystem. There are millions of people who own not just an iPhone or an iPad, or a Mac, but all three. Given this, it is rather difficult and uncomfortable for users to switch away from Apple. That is not to say that it is impossible. If another company, I have no clue who it will be, comes along with superior devices, consumers will, over time, shift away from Apple to the competitor. However, the Apple Ecosystem gives Apple an advantage in that consumers are more likely to stick with Apple.
Valuation is, perhaps, the most compelling reason for Buffett to buy Apple. Currently, Apple is trading at 10 times trailing earnings and 8.5 times forward earnings. These numbers would lead you to believe that Apple's earnings have stagnated and are no longer growing. This is not the case. I am confident that Apple will continue to grow earnings going forward, albeit at a slower pace than before. Interestingly the company is trading at a lower PE ratio than Berkshire's five largest holdings, Coca-Cola, IBM, Wells Fargo, American Express, and Proctor & Gamble.
While Warren Buffett has not been a fan of technology stocks, I think it is possible that he picks up some Apple shares. As has been proven by his IBM move, Buffett is willing to deviate from his own principles under special circumstances. There are a few reasons why Buffett may be willing to make an exception for Apple. Maybe, Buffett is of the belief that, like IBM, Apple has a wide competitive moat. Alternatively, Buffett could be drawn to the company because of its ridiculously cheap valuation. A change in AAPL's plans to return money to shareholders could also pique Buffett's interest. Finally, any combination of these could also lead to Buffett buying AAPL.
sammypollack has no position in any stocks mentioned. The Motley Fool recommends Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple, Berkshire Hathaway, and International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!