This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Apple Inc (NASDAQ: AAPL) is one of Warren Buffett's favorite stocks; there's no secret about that. He has previously referred to it as "probably the best business I know in the world." And within Berkshire Hathaway's portfolio, it normally accounts for a considerable percentage of the stock holdings. It's still in the top spot today, but the percentage has dropped significantly after Buffett recently sold a big chunk of Apple stock.
Is this a bad omen for the highly valued stock, that perhaps its valuation is too high? And could it be a sign that Buffett is worried about future economic conditions? Here's a closer look at what it may mean for investors, and whether you should consider following suit to sell shares of Apple as well.
Buffett sold Apple stock earlier this year, too
Earlier this month, investors learned through a filing that Berkshire has reduced its stake in Apple stock -- by nearly 50%. It's a massive stock sale, and it comes after a sale in the first quarter where the holdings were reduced by 13%. This sale is on a much larger scale, and thus, is much more noteworthy for investors. It is typical for investors to sell a few shares of a highly successful investment and take some of the profit. But such a mammoth reduction has investors wondering about the reason behind the move.
One thing to note, however, is that despite the sale, Apple remains the top holding in Berkshire's portfolio. But at less than 30%, it's not nearly as high as it has been in the past when it accounted for about half of Berkshire's stock investments.
Does the sale of Apple stock mean Buffett is worried about the future, or the stock's valuation?
Investors don't know the reason for the stock sale, but that doesn't mean we can't take a closer look at some possible reasons and determine how probable each one is in explaining Buffett's recent move.
The first is valuation. Valuation is important for investors because if a growth stock reaches an egregious price point, it may be difficult to expect more of a return from owning the stock. But that's not a probable reason for the stock sale, simply because Apple's valuation has actually been coming down recently. If Buffett was concerned with its price, he could have opted to make a big sale back in 2021 when shares of Apple were trading at more than 40 times their trailing earnings.
AAPL PE Ratio data by YCharts
Next, there are concerns about Apple's slowing growth rate, which could weigh on Buffett's decision. Apple, however, hasn't always been a fast-growing business and while its growth rate has been slowing down, revenue for the period ending June 29 was up 5%, totaling $85.8 billion. And diluted earnings per share of $1.40 rose by 11%. The business is still doing well, and with new artificial intelligence capabilities coming to its new iPhones, there's reason to be bullish that its sales growth could accelerate in the near future.
Lastly, there are concerns about the economy. While Apple may be doing well, a recession could happen soon, and that may impact the business. Buffett, however, has held on to investments during recessions, wars, and all sorts of economic headwinds. And in the past, he has made it abundantly clear he isn't concerned about forecasts for the future, stating that, "forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."
Ultimately, Buffett looks out for Berkshire's shareholders. When discussing the Apple stock sale earlier this year, he alluded to it potentially having to do with tax reasons and that selling shares now could benefit Berkshire shareholders if there's a possible increase in the capital gains tax in the future. Given Apple's sizable 340% returns over the past five years, Buffett may have simply found it prudent to realize some of those profits now.
Investors shouldn't read too much into Buffett's sale of Apple stock
Without confirmation from Buffett, investors won't know the real reason behind the recent sale of Apple stock. But it should be related to doing what's best for Berkshire shareholders more than anything else. Berkshire hasn't dumped all of its stake in Apple, and there's no reason to suggest that the business has somehow become a worse buy, as its valuation has come down and its growth prospects may improve in the near future. If you're holding Apple stock, this isn't a reason to worry or to sell your shares. It's still a good investment to hang on to.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
