Warren Buffett invested $2.9 billion in his favorite stocks this year (hint: not Apple)

In 1962, Warren Buffett began buying shares in a textile manufacturing company called Berkshire Hathaway (BRK.A -0.99%) (BRK.B -1.18%). In 1965, he took control of the New England operation and began using it as a holding company to acquire other businesses and buy stock.

Under his leadership, Berkshire’s stock returned 20% annually for nearly six decades, roughly doubling the gains of S&P 500 (SNPINDEX: ^GSPC). Meanwhile, Buffett has amassed a personal fortune of $150 billion. These achievements make him one of the best investors in American history.

Today, Buffett manages about 90 percent of Berkshire’s stock portfolio, including the largest positions, while fellow investment managers Todd Combs and Ted Weschler handle the rest. Buffett can also buy back Berkshire shares when he believes they are trading at a discount to their intrinsic value.

With this in mind, Buffett made two important capital allocation decisions in the first half of 2024:

• He sold 505 million shares of Apple (AAPL -0.70%)reducing Berkshire’s stake by more than 50%.
• He bought back $2.9 billion in Berkshire stock, meaning the stock was undervalued in his estimate.

Importantly, Buffett has bought back Berkshire stock every quarter for six straight years, spending a cumulative total of $78 billion on buybacks during that time. He also has 99% of his net worth invested in the company — I’m not talking about Berkshire’s portfolio, but rather Buffett’s personal wealth. That makes a compelling case for Berkshire being his favorite stock.

Here’s what investors should know about Apple and Berkshire.

1. Apple

Apple has cultivated brand authority by pairing attractive hardware with proprietary software to create a user experience for which consumers willingly pay a premium. The average iPhone costs more than twice as much as the average Android smartphone, and Apple dominates the smartphone market in terms of revenue share. It is also the market leader in digital tablets and smartwatches outside of China and the fourth largest PC manufacturer by shipment volume.

However, Apple’s innovation engine seems to be losing steam. The company introduced the iPhone, iPad and Apple Watch over a nine-year period that ended in 2015, but Apple hasn’t released a new viral product since AirPods hit the market in 2017. Additionally, iPhones account for about 45% from total revenues. , but iPhone sales have yet to surpass the record $71.6 billion in the first quarter of 2021.

In short, Apple’s long-term growth prospects in hardware are less compelling, even though many analysts expect a massive upgrade cycle after the release of Apple Intelligence, a suite of generative artificial intelligence (AI) features for the iPhone and MacBook , expected in October. This means that future revenue growth is heavily dependent on services such as advertising, Apple Pay, the App Store and iCloud storage.

However, services make up less than 30% of total revenue, so that segment can only move the needle slowly. That’s a problem because Apple’s stock is priced for robust growth. The stock is currently trading at 33.6 times earnings. Meanwhile, Wall Street expects earnings to grow 8.6% annually over the next three years. These numbers offer a price-to-earnings-growth ratio (PEG ratio) of 3.9, a significant premium to the three-year average of 2.6. At that price, Apple seems overvalued.

Personally, I would avoid this stock and (like Buffett) consider reducing my position if I were to take profit.

2. Berkshire Hathaway

Berkshire Hathaway is the world’s largest insurance company as measured by float, a term that refers to the money an insurer holds between the time customers pay premiums and file claims. Because of disciplined underwriting, Berkshire paid less than nothing to build up the fleet, and Warren Buffett invested these funds very effectively.

Berkshire Hathaway had more than $250 billion in fixed income securities (bonds and treasury bills), $285 billion in equity securities (stocks) and $40 billion in cash on its balance sheet as of the quarter ended in June. The amount of those invested assets has steadily increased. In fact, Berkshire’s book value per share — a good benchmark for changes in intrinsic value — has risen 11.3% annually over the past decade, outpacing the S&P 500’s 10.8% annual gain.

Buffett has also used insurance to buy dozens of subsidiaries spanning the gamut of the US economy, from energy and utilities to manufacturing and retail. Berkshire even owns the Burlington North Santa Fe freight railroad, which occupies a critical link in the domestic supply chain. Importantly, since those subsidiaries were generally vetted by Buffett, we can assume they met his standards for having a sustainable economic moat.

This means that Berkshire is an above-average collection of businesses operating in a diverse range of industries. These qualities make the company resilient during economic downturns. Since 1980, Berkshire’s stock has outperformed the S&P 500 by an average of 4.4 percentage points during recessions, according to Bespoke Investment Group.

Wall Street expects Berkshire to grow operating earnings (which excludes gains and losses on investments) by 18% annually through 2027. That estimate makes the current valuation of 23.5 times operating earnings seem reasonable. Investors, especially those worried about an economic downturn in the near future, should consider buying a small position in this stock today.