Buffett initiated a stake worth almost $1B in Apple (NASDAQ:AAPL) in Q1. The news is quite surprising, given the aversion of the Oracle of Omaha to tech stocks. The news is also very beneficial to the stock of Apple, which had lost 15% since its earnings release three weeks ago but is up (3.5%, as of this writing) thanks to the announcement. Nevertheless, investors who are about to follow Buffett in his most recent purchase should think twice before they pull the trigger. This does not mean Apple may not achieve great returns in the future. It just means cautiousness is needed before purchasing the stock.
First of all, Buffett is well-known for his aversion to the tech sector. He has invested only once in a tech stock, International Business Machines (NYSE:IBM), and his thesis has not been vindicated so far. More specifically, IBM is currently Berkshire's 4th largest stake at 8.5% of the US portfolio. The stake was initiated in Q3-2011 and has greatly increased since then. The average purchase price for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is around $170 while the stock is currently trading at $149. Therefore, while S&P (NYSEARCA:SPY) has advanced 55% in the last 5 years, the stake of Berkshire in IBM has decreased 12%.
The major reason for the poor returns of IBM has been the extremely heated competition the company has been facing from its peers, which has resulted in the earnings declining for four years in a row. While Buffett purchased the stock for its seemingly attractive valuation, it finally turned out that the market had good reasons for attributing a low P/E to the stock. All in all, Buffett was proven wrong in his thesis on the first tech stock he purchased. Of course, he has not admitted that yet and he hates to sell at a loss, but he recently admitted that his stalwarts, Coca-Cola (NYSE:KO), American Express (NYSE:AXP) and IBM will never be the same again, meaning that their moat has greatly narrowed due to the increased competition.
It is also worth keeping in mind that Buffett purchased another giant in terms of market cap two years ago, namely Exxon Mobil (NYSE:XOM). Again, it was a great surprise, given his aversion to oil producers. More specifically, Buffett had repeatedly stated that he did not like oil producers because they needed to continuously spend excessive amounts on capital expenses only to replenish their reserves. Nevertheless, he made the decision to invest in Exxon Mobil and the market greatly rewarded the oil giant on the news and thereafter, sending it to new all-time highs.
Unfortunately, for those who followed Buffett on this stock, the timing was the worst possible. To be sure, Buffett purchased the stock just a few weeks before the price of oil started to collapse. Consequently, a few weeks after the dive started, Buffett evaluated his investment again and sold his stake promptly, just 2-3 months after his purchase, with just a minor loss. Unfortunately, for his followers, they found out his divestment only 3 months later, as there is a lag period between his transactions and the disclosure of his transactions. Therefore, those who followed him incurred some losses. Moreover, it was proven that he had poor timing in that purchase, which was out of his scope of expertise. To convey the correct message from this purchase, the essence is not the poor timing of Buffett. Buffett has repeatedly exhibited excellent timing in his calls even though he says he has no timing skills. The lesson is that Buffet's followers found out the change of his view on the stock 3 months after he sold, so it was too late to avoid losses.
It is also worth noting that Berkshire has stopped outperforming the market by a wide margin in the last few years. More specifically, while Berkshire outperformed the market by a wide margin in almost every year from 2000 to 2008, it has outperformed the market only in 2 out of the last 8 years. Therefore, it is evident that the market has become much smarter in the recent years or Buffett is losing his edge.
Moreover, it is critical to note that Buffett would have underperformed the market even more if he had not made some exceptionally profitable deals thanks to his financial power. For instance, he has purchased preferred shares of Bank of America (NYSE:BAC), which offer him an exceptionally high dividend yield. The Kraft-Heinz deal is also another example of a profitable deal that was assisted by his financial power. Of course, there is nothing wrong in Buffett utilizing his financial power to take advantage of unique opportunities, but individual investors should realize that they will never be able to achieve the same deals. If these remarkable deals are excluded from the equation, then the stock-picking competency of Buffett in the recent years turns out to be even less spectacular.
In reference to Apple, the company reported its first revenue decrease in 13 years and missed the analysts' estimates by 5% in Q1. This has caused the above-mentioned decline of the stock and the market now fears that the company may not be able to keep pushing more and more products to its customers, as it has done in all the recent years. Of course, if the company keeps coming up with exciting new products every year, the stock will greatly rally from its current level, which is only 11 times this year's expected earnings. However, this is doubtful at the moment. A negative signal from the management is the great boost to its share repurchases, from $140B to $175B. My experience has taught me that a management resorts to excessive share repurchases when it finds it hard to improve results without financial engineering. In any case, it is really hard to determine whether Apple will be able to return to its growth trajectory any time soon. However, it is quite clear that Buffett is not the most appropriate expert to answer this question.
To sum up, while Apple is rallying on the announcement of the stake of Buffett in the company, investors should be very careful before they follow the Oracle of Omaha in this purchase. Buffett has not exhibited exceptional stock-picking skills in the last few years, particularly in sectors that are completely out of his scope of expertise. In addition, Buffett may have a totally different time horizon from most investors and patience that most investors cannot afford to have.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.