Warren Buffett reaps $40 billion from giant Apple stake since March bottom

Warren Buffett.

Gerald Miller | CNBC

An off-brand move to pile into Apple shares might have been Warren Buffett's greatest trade ever. 

Berkshire Hathaway's Apple stake — which is now 40% of its equity portfolio — is up a whopping $40 billion since the market bottom in March. The investment in the tech giant played a crucial role in helping the conglomerate weather the coronavirus crisis as other pillars of its business, including insurance and energy, took a huge hit.

Investing in such a high-flyer seemingly defies Buffett's well-known value investing principles. Berkshire bought its first 10 million Apple shares in May 2016 through one of Buffett's lieutenants. In the span of four years, the "Oracle of Omaha" ditched his usual aversion to tech and increased his bet to 245 million shares, now worth more than $95 billion, to become Apple's second largest shareholder, only behind Vanguard.

The stake cost Berkshire about $35 billion, or $141 per share, according to estimates based on disclosures in its 2019 annual letter. So that means overall the "Oracle of Omaha" — who took a lot of criticism for bailing on airlines during the pandemic before their shares snapped back a bit — has more than doubled his money and made $60 billion on Apple in total. 

"Had he stuck to his guns and only bought value stocks, that portfolio would not have done as well," Cathy Seifert, a Berkshire analyst at CFRA Research, told CNBC. "At the end of the day, shareholders are going to applaud this move."

Shares of Apple are up more than 10% in the past month alone, bringing its 2020 gains to more than 32%. The stock got another boost on Wednesday as it won a landmark court case against the European Commission over a dispute concerning nearly $15 billion in Irish taxes.

Outside of Bershire's equity portfolio, the company has a mashup of businesses from railroad giant BNSF to insurer Geico to Dairy Queen, which are less immune to the pandemic, to say the least.

"He manages some really large, really long reinsurance risk," Seifert said, referring to Berkshire's insurance business. "There are some serious claims that have to be paid and he needed to keep powder dry for that."

Berkshire Class A shares gained more than 6% this month to $285,520 apiece as of Wednesday, trimming its 2020 losses to about 15%. The stock tumbled nearly 20% in the first quarter. 

'Third-largest business'

Berkshire's stock portfolio had been concentrated in financials and consumer plays before the conglomerate dipped its toes in technology. Consequently, Buffett had missed out on Big Tech's massive run that drove the last bull market. 

Now, the billionaire investor calls Apple Berkshire's "third-largest business," after its insurance and railroad interests. Buffett previously said iPhone is a "sticky" product, keeping people within the company's ecosystem.

"It's probably the best business I know in the world," Buffett said in a CNBC interview in February. "I don't think of Apple as a stock. I think of it as our third business."

Berkshire also owned 533,300 shares of Amazon as of the end of the first quarter, now worth more than $1.6 billion. One of Buffett's deputies — Todd Combs or Ted Weschler — made the bet on the e-commerce giant in 2019.

Buffett raised eyebrows a few months ago when he revealed he dumped the entirety of his airline investments, worth north of $4 billion, because of the fundamental change to the industry caused by the coronavirus. 

It was a rare move for the buy-and-hold investor who received criticism for taking a big loss for this trade. Berkshire exited its airline stake before the shares' massive rebound as the economy reopened partially. United and American Airlines rallied more than 20% each last month alone, while Delta Air Lines jumped over 10% in June.

However the comeback has stalled lately and the shares are still way off from their old highs, in some cases by more than half. So Buffett could still be right about the airlines as investments.

And in reality, the loss from the airline trade pales in comparison to Berkshire's huge return from Apple so far.

Challenge ahead?

"The challenge for Buffett is — are we in a financial euphoria episode and is Apple going to get sucked down?" said Bill Smead, chief investment officer at Smead Capital Management and a Berkshire shareholder.

Many on Wall Street have issued dire warnings on megacap technology companies, comparing their sky-high valuations and recent rally to the episode before the burst of the tech bubble in 2001. Buffett did avoid the dot-com buildup in the late '90s and was criticized at the time for not joining into that buying frenzy.

Apple is among the so-called FAANG block that pushed the Nasdaq Composite to a new record, marking the first U.S. equity benchmark to wipe out the coronavirus losses. Shares of Apple are trading at about 30 times forward earnings. 

"Apple is not the most egregious part of this, but like it or not, it is twisted up in the game," Smead said. He believes it's unlikely Buffett will sell his Apple stake anytime soon.

"He's a long-term holder and he does not like to pay the tax on the gain," Smead said.

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