Warren Buffett has made a significant change in Berkshire Hathaway’s investment portfolio. According to SEC filings, Buffett sold about half of Berkshire’s stake in Apple, raising around $80 billion in cash. Apple has been a big winner for Berkshire Hathaway, with the stock delivering large returns over the years.
However, the company is now facing stagnating revenue growth due to market saturation for smartphones and challenges with innovation. Recent products like the Apple Vision Pro have not performed well, and the company’s valuation, with a P/E ratio close to 35, seems high for a low-growth business. Given Buffett’s focus on valuation, it’s not surprising he chose to sell some of the company’s shares.
With the money from the Apple sale, Buffett’s biggest stock purchase in the second quarter was Occidental Petroleum. Berkshire Hathaway now owns a large 27.25% stake in Occidental, making it the largest shareholder. The appeal of Occidental is mainly due to its valuation.
Buffett prioritizes value in investment
The stock has a P/E of 12.6, providing better value compared to Apple. Occidental is also one of the largest oil producers in the U.S., with over 82% of its production coming from domestic sources, which lowers geopolitical risks.
Occidental gives Berkshire a hedge against rising oil prices, which can be inflationary and affect other parts of the economy and the company’s portfolio. For example, if oil prices go up, Occidental Petroleum will benefit; on the other hand, higher oil prices may hurt the earnings power of Berkshire’s railroad subsidiary by increasing input costs. Buffett’s strategy shows an important lesson in the risk-free rate and its impact on investment decisions.
Berkshire Hathaway currently has nearly $300 billion in cash with much of it in short-term U.S. Treasury bills, earning around a 5% yield each year. The earnings yield of Apple’s stock, based on its current P/E ratio, is about 2.9%, which is less attractive compared to the risk-free yield from Treasury bills. In contrast, Occidental’s earnings yield is 7.9%, making it a more appealing investment.
This strategic move highlights Buffett’s systematic approach to evaluating investments based on their yields relative to risk-free rates. It also shows his preference for value over growth, confirming his investment philosophy.
