Warren Buffett just sold half of his apple stock. 3 reasons not to panic.

The news that Warren Buffett’s Berkshire Hathaway (BRK.A -0.21%) (BRK.B 0.03%) he sold half of them Apple (AAPL 1.37%) the stock was likely a shock to many investors. Although it has often been the stock with the largest market cap in recent years, its growth has played a significant role in Berkshire’s stock growth over that period.

However, from another perspective, the sale is probably not as monumental as it seems. Three key points illustrate why investors should not panic about this move.

1. Apple remains Berkshire’s largest holding company

Despite the size of the move, Berkshire Hathaway still owns about 400 million shares of Apple. At about $84 billion, it represented about 29% of Berkshire’s holdings at the end of the second quarter, well above Bank of America to 14%.

Also, even at a dramatically lower share count, Berkshire still has a very undiversified position in Apple stock. Buffett has long preached diversification, and last quarter’s position of 789 million Apple shares meant that Apple made up just under half of Berkshire’s portfolio.

Moreover, the remaining position implies a continued belief in the company. Even as it faces a competitive battle with its mega-tech peers in the AI ​​space, its leadership in smartphones and the strength of the iOS ecosystem make it a technology leader.

Additionally, Apple boasts approximately $153 billion in cash, giving it one of the world’s most stable balance sheets among publicly traded companies. This level of stability makes Berkshire’s large position less risky, and with this recent sale, it is closer to having a diversified portfolio.

2. Apple stocks had become (relatively) expensive

In addition, Buffett and his team may have become concerned about its valuation. Its P/E ratio of 32 is hardly in the stratosphere, but its valuation has risen significantly over the years, increasing the likelihood that it will realize most of the multiple expansion that was to come.

Investors should remember that Berkshire acquired most of its Apple shares between the first quarter of 2016 and the third quarter of 2018. In early 2016, Apple often traded at 10 times earnings.

Its P/E ratio has risen steadily during this time. However, it took until the third quarter of 2018 for the earnings multiple to rise above 20. Thus, Berkshire has benefited from significant multiple expansion, resulting in a roughly 700% increase in the stock since Buffett’s team began buying . Since S&P 500 has delivered a total return of just under 200% since then, Apple has been a clear winner for Berkshire.

AAPL data by YCharts

3. Berkshire Hathaway’s size means it needs liquidity

Another reason for the sale may come with the difficulty of managing an investment company the size of Berkshire Hathaway. Its market cap now stands at around $890 billion at the time of writing.

While growing to this level is undoubtedly an impressive feat, it comes with a key struggle. Due to the law of large numbers, getting just 10% growth means the market cap needs to increase by $89 billion. That’s just below average market capitalization of an S&P 500 stock, which is $92 billion.

In comparison, that average company only needs to grow by $9.2 billion to achieve the same growth rate. This also means that a $9.2 billion acquisition, which would be significant for a regular company, barely moves the needle for Berkshire.

This brings Berkshire’s liquidity position back to $271 billion. While this may seem excessive, he probably needs that much money to make significant purchases. Therefore, its liquidity position may not be as attractive as many investors and analysts assume.

Understanding Berkshire Hathaway’s Sale of Apple

Ultimately, investors should view the selloff in Apple stock as an inevitable move rather than a game changer.

Yes, the sale is massive by almost any measure. However, the 400 million share position is still a vote of confidence in Apple’s future, representing a very undiversified percentage of Berkshire Hathaway’s portfolio. Apple has also become relatively expensive, especially compared to when it first started buying the stock.

Finally, Berkshire’s massive size means it needs a sizable liquidity position to make any meaningful moves. So instead of viewing this sale as historic for Berkshire, investors should see the move as business as usual for the investment giant.