Buffett's Berkshire Buys Into Apple

May 16 2016 | 9:11pm ET

By Jonathan Stempel (Reuters) - Warren Buffett's Berkshire Hathaway revealed a more than $1 billion stake in Apple in a rare foray into the technology sector, which the billionaire has largely shunned apart from a poorly performing investment in IBM.

Shares of Apple rose 3.7 percent on the news, closing up $3.36 at $93.88. Berkshire made its investment in the first quarter, before the iPhone maker in April reported its first quarterly revenue decline in 13 years.

The investment came despite an increasing view among investors that Apple may deserve a lower valuation because its heady growth days may be over. However, Apple has a strong balance sheet and management, attributes long favored by Berkshire.

"It makes sense because it's a consumer company disguised as a technology company with a great business model, strong cash flow and a cheap valuation," said Jeff Matthews, author of books about Buffett and a principal at the Ram Partners LP hedge fund. "It's not a leap of faith."

In a regulatory filing detailing most of its stock holdings, Berkshire said it held 9.81 million Apple shares worth $1.07 billion as of March 31.

The value has since fallen to about $921 million, despite Monday's gain. Berkshire's largest technology bet has been Buffett's roughly $12.1 billion stake in International Business Machines Corp, an investment now more than $1.6 billion in the red.

Apple stock "is stunningly cheap, and it has a massive pile of cash," said Steve Wallman, founder of Wallman Investment Counsel in Middleton, Wisconsin, who has owned Berkshire since 1982 and Apple since 2003. "Apple is not getting credit for research and development it is doing behind the scenes."

An Apple spokeswoman did not respond to requests for comment.

APPLE FALLS

The Apple investment was made by one of Buffett's two stockpicking deputies, Todd Combs and Ted Weschler, his assistant said in an email to The Wall Street Journal.

Combs and Weschler, who ran hedge funds before joining Berkshire, each invest about $9 billion and usually make smaller wagers, while their boss, known as the Oracle of Omaha, makes bigger investments such as IBM.

Investors said Combs may have been the Apple buyer. He invested in chipmaker Intel for Berkshire in 2011.

Buffett's assistant did not respond to a request for comment.

In April, Apple said quarterly revenue declined as an increasingly saturated smartphone market hurt iPhone sales, which fell for the first time.

Chief Executive Tim Cook is looking to develop other technologies for the Cupertino, California-based company, and last week unveiled a $1 billion investment in Chinese ride-hailing service Didi Chuxing.

Apple's market value last week dipped below that of Google parent Alphabet, even though Apple generates roughly triple the revenue and profit. Before Monday, shares of Apple had fallen by one-third from their April 2015 peak.

"It's a value stock that has the potential for a big growth," said Steve Chiavarone, a portfolio manager at Federated Investors in New York. He said he invests in Apple stock, and that its price-earnings multiple is lower than his other technology sector investments.

Hedge fund manager David Einhorn is also a fan, as his firm Greenlight Capital on Monday said it boosted its Apple stake by 31 percent in the first quarter.

Other prominent investors have retrenched.

Last month, billionaire Carl Icahn said he sold his Apple stake on concern about the company's relationship with China.

David Tepper's Appaloosa LP sold its stake in the first quarter, while Ray Dalio's Bridgewater Associates and Chase Coleman's Tiger Global Management slashed their stakes. Leon Cooperman's Omega Advisors also shed its Apple stake, a person familiar with the matter said.

YAHOO

Despite his aversion to technology sector, Buffett told CNBC on Monday, he offered to help Dan Gilbert, the chairman of Quicken Loans and owner of the Cleveland Cavaliers basketball team, finance a bid for Internet company Yahoo.

Reuters first reported Buffett's involvement on Friday.

While Buffett told CNBC he would not be an equity partner, he could collect dividends or interest on the financing, and perhaps take an equity stake later.

"Buffett has always restricted himself from investing in things he doesn't know or understand, and staying within his circle of confidence," said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which invests 8 percent of the $350 million it manages in Berkshire.

The Apple investment may have been made with proceeds from the sale of AT&T stock, as Berkshire exited what had been a $1.6 billion stake.

In Monday's filing, Berkshire also reported higher stakes in IBM, Bank of New York Mellon, Deere & Co and Visa, and lower stakes in MasterCard and Wal-Mart Stores.


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