Mr. Buffett recently extolled the powerful economic moat of one of the world’s most iconic companies: Apple. Berkshire spent a bit over $30bn to acquire their Apple stake, which now sits at 936 million shares. The relentless rise in the share price puts Berkshire’s Apple position at $160bn today, their largest holding.

Mr. Buffett has dubbed the tech giant a consumer products company. No matter what you call it, Berkshire Hathaway’s Apple investment has created staggering profits. Tim Cook’s iPhone maker has charmed the Oracle of Omaha. Berkshire seems content to not-pay-taxes and hold this incredible profit engine.

We certainly understand his view and that of other Apple bulls. At 199 ranked, our model sees shares of Apple for what they are: a fantastic company trading at an unforgiving multiple. This leaves the stock in the dreaded land of “neutral,” an issue we detailed in Apple II Flashback: The Fantasy of Predicting the Future.

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Warren Buffett’s Apple Investment vs. a Popular Growth Stock

Unlike some other bloated market caps that rest on little to no profits, Apple is an extraordinary cash machine. Yet, in its most recent earnings report, the company showed the inevitable headaches around the law of large numbers.

Quite simply, growth gets harder as you mature into a monolith as shown in the below chart.

FAANG Revenue Growth

Source: Otavio Costa at Crescat Capital

At 30x monstrous ex-growth earnings, Apple’s PE ratio leaves little room for any equity risk premium. Yet this is hardly an anomaly, particularly in the land of big tech stocks.

As KCR has extensively documented, US stocks currently sit at near-record multiples on record margins. The investing public is as bullish as any time in history on American equities. This stands in sharp contrast with 1989.

US vs Global equities

 

In that awful year, the investing public found little to like about US equities. The S&P traded at a 50% lower multiple on margins that were half today’s record levels.

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With investors all-in on America today, it is worth noting that some have highlighted how Apple is effectively a Chinese company.  KCR would also note that Mr. Buffett is putting new money to work in Japan.

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

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