Warren Buffett just cut Berkshire Hathaway’s stake in Apple in half. Why?

Berkshire Hathaway (BRK.A -0.21%) (BRK.B 0.03%) CEO Warren Buffett once referred in 2020 to Apple (AAPL 1.37%) as Berkshire’s third business, after its insurance arm and BNSF railroad. However, that may not be the case for long.

The Buffett-led conglomerate unloaded a large portion of its stake in the iPhone maker in the second quarter, the company disclosed in its recent earnings report. Berkshire reduced its holdings in Apple from $135.4 billion at the end of the first quarter to $84.2 billion at the end of the second quarter.

Apple stock also rose 23% in the second quarter. If you assume the sale occurred toward the end of the quarter, Berkshire gave up about half of Apple’s stock. Berkshire began selling Apple in the first quarter, and the value of its stake in the tech giant fell 56% from the end of 2023, when it was worth $174.3 billion.

Why did Berkshire divest so much of Apple after Buffett has so often trumpeted the company’s praises? There is no clear answer to this question, but I can make several educated guesses based on Buffett’s past behavior and Berkshire’s historical patterns. Here’s a closer look.

Image source: The Motley Fool.

1. Fiscal management

After Berkshire’s May 13-F filing showed the company sold more than 116 million Apple shares, reducing its stake by 13 percent, Buffett addressed the move at the annual shareholder meeting in May. He suggested the sale was to cover any risk of capital gains tax rates rising, telling his audience: “If I do (pay capital gains tax) at 21% this year and we do it a little bit more great. later, I don’t think you’ll mind that I sold a small Apple this year.”

Buffett was referring to talk in Washington about raising the capital gains tax rate, although there are no specific plans to raise it. However, Berkshire may have continued to sell Apple in the second quarter for the same tax-motivated reason, even though there has been no recent progress on raising the capital gains tax rate.

2. Evaluation

Buffett did not comment specifically on Apple’s valuation, but he has sometimes bemoaned expensive stock market valuations and seems to think prices are once again stretched.

And Apple stock rose. It ended the quarter with a price-to-earnings ratio of more than 32, hitting its highest level since the early days of the pandemic, when its growth picked up, driven by remote work and school and the need for new devices.

By comparison, Apple’s growth has slowed considerably since then, with revenue rising 4% in its most recent quarter. Under the circumstances, Berkshire’s reduction in Apple ownership would make sense, although it’s unclear whether the sale was driven by valuation.

3. Cash collection

Another plausible reason for Berkshire to sell Apple is to raise cash, perhaps to buy more stock or make an outright acquisition. In Berkshire’s May shareholder letter, Buffett referred to the company’s ability to capitalize on market sales as “our not-so-secret weapon.” To be able to use this weapon, Berkshire needs cash on hand to buy stocks and businesses at a discount. In that sense, the sale of Apple, by far Berkshire’s largest holding, makes sense.

The sale helped Berkshire boost its cash hoard, as the company ended the second quarter with $272 billion in cash, cash equivalents and short-term T-bills. That’s a substantial increase from $163 billion at the start of the year.

Buffett and his Berkshire management team may have been bracing for a market selloff, and it looks like they’ve been rewarded with one. The S&P 500 shed 6% in a three-day span ending Monday.

What’s also notable is that Berkshire has not significantly reduced any of its other top five holdings, although it has sold some Bank of America recent stock. That indicates there may be more behind Apple’s stock selloff than cash-raising.

We should learn a bit more when Berkshire files its 13-F update on its holdings next week, which will reveal a full list of purchases and sales.

Apple still remains Berkshire’s largest holding after the second quarter and could certainly remain so, so the selloff could have been driven by rebalancing as well as other portfolio management guidelines. Apple’s valuation or slowing growth may also have contributed to the selloff.

While we’ll probably never know for sure, Apple investors should take comfort in knowing that the stock remains Berkshire’s largest holding, and Buffett has praised the company several times.