Renowned investor Warren Buffett’s exceptional track record has earned him a reputation as one of Wall Street’s most revered figures. With a personal fortune of $140 billion and Berkshire Hathaway’s remarkable growth under his leadership, Buffett’s investment prowess is undeniable. Since taking the reins in 1965, Berkshire’s Class A stock has returned an impressive 20% annually, outpacing the S&P 500’s 10% annual return.
Buffett’s shrewd capital allocation decisions have been instrumental in driving Berkshire’s success. He has orchestrated numerous savvy acquisitions, made prudent investments, and repurchased company stock, creating significant shareholder value. Two recent capital allocation decisions, in particular, warrant attention.
In the June quarter, Buffett sold 389 million shares of Apple, while simultaneously investing $345 million in his favorite stock. Berkshire first acquired a stake in Apple in 2016, and it has since become the company’s largest holding. Despite Buffett’s admiration for Apple CEO Tim Cook and the iPhone, he has been trimming the position, citing a potential increase in corporate tax rates as the primary reason.
Buffett believes that higher taxes will be implemented to address the federal government’s historic deficit, which would result in Berkshire paying more taxes on its earnings, including investment gains. This strategy makes sense, but it raises questions about why he is focusing on Apple specifically. The answer lies in valuation; Apple’s current valuation of 34.4 times earnings appears expensive, with a PEG ratio of 4, significantly higher than its three-year average of 2.7.
Meanwhile, Berkshire’s amended stock buyback program allows Buffett to repurchase shares when he believes they are undervalued compared to their intrinsic value. With $345 million allocated to stock buybacks in the June quarter, bringing the total to $2.6 billion year-to-date and nearly $78 billion since 2018, it’s clear that Buffett considers Berkshire his favorite stock.
Berkshire’s unique advantage lies in its insurance business, which generates substantial investable capital through disciplined underwriting. This float has enabled Buffett to create significant value for shareholders, with Berkshire’s book value per share increasing 194% over the past decade, outpacing the S&P 500’s 179% return.
With Wall Street expecting Berkshire’s operating earnings to increase at 17% annually through 2027, the current valuation of 23.3 times operating earnings appears reasonable. Patient investors may find confidence in buying a small position in Berkshire, particularly as Buffett continues to repurchase shares.
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