When it comes to investing, Warren Buffett says investors should go with index funds. But Buffett himself takes a different approach by buying individual stocks, such as Apple Inc. (NASDAQ:AAPL). The question is: Should you do as Buffett says and index, or do as Buffett does, and buy AAPL stock?
Buffett’s lack of technology exposure is well-known among Wall Street veterans. In fact, many even ridiculed the Oracle of Omaha for missing out names like Apple, Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN).
Until Apple came along, International Business Machines Corp. (NYSE:IBM) was Buffett’s largest tech play. He used to say he skipped over tech stocks because he didn’t understand them well enough.
But it appears that Buffett’s understanding of technology is growing.
In 2016, Berkshire Hathaway Inc. (NYSE:BRK.B) reported a 9.8 million-share position in AAPL stock as of March 31. That position almost doubled to 15.2 million shares as of Sept. 30, then almost quadrupled to a whopping 57.3 million shares by year’s end.
So what has Buffett done with AAPL stock in 2017?
The Oracle of Omaha has more than doubled his position. The stake now stands at some 133 million shares worth about $18.1 billion. Buffett buying some 75 million shares of AAPL stock in such a short span shows confidence in Apple.
While Buffett is not known for his short-term predictions, he is heralded for his long-term investments. So, what does he like so much about Apple stock anyway? “Apple strikes me as having quite a sticky product, and an enormously useful product to people that use it,” Buffett told CNBC in late-February.
Perhaps the most ironic part of Buffett’s discussion on Apple centered on his own device — the famed investor doesn’t even own an iPhone.
Positives for AAPL Stock
Apple stock has a lot of positives. For starters, the company is flush with cash. With more than $40 per share of cash, Apple could go on a transformative M&A spree — even with the repatriation tax that, right now, it would have to pay. Add in the potential for a tax repatriation holiday from the Trump administration, and Apple’s in even better shape.
Additionally, Apple is a cash cow that continues to bring in billions of dollars each quarter, which should help continue to fund dividends and stock buybacks. Plus, its cash hoard should continue to grow over time.
Despite rallying more than 40% over the past eight months, AAPL stock still trades with a below-market valuation. Sporting a price-to-earnings ratio of around 16, it’s hard to consider Apple overvalued.
And the valuation argument is important. Too many investors try to justify a higher Apple stock price by applying a market-average multiple. That’s an inaccurate measurement, as Apple tends to trade between a P/E range of 10 to 17 (more on that in a moment). So rarely will it trade in-line with the average S&P 500 stock.
With that said, having a low valuation is part of what makes Apple stock attractive. Shares go through pretty extreme ups and downs. But long-term investors can feel confident in buying a stock that’s not egregiously priced.
Finally, investors can look forward to Apple releasing the much-anticipated iPhone 8 later this fall. With a higher potential selling price and plenty of fancy features, the new device is likely to drive record results.
Add on its quickly growing, high-margin Services business, and AAPL stock becomes even more attractive for long-term investors.
Should You Follow Buffett Into AAPL Stock?
With all these positives, Apple stock may seem like a slam-dunk.
However, I think investors would be best off waiting for a pullback. While we just highlighted its P/E ratio as a positive, it is close to the top of its five-year range. AAPL stock is cheap compared to the average stock, but getting expensive compared to its historical average.
Additionally, Apple stock has gone on a massive rally. While it’s admittedly consolidating nicely just under $140, I find it hard to be a buyer at these levels.
With the overall market still up big, I can sleep more comfortably at night waiting for a pullback to buy Apple stock. If it doesn’t materialize, that is something waiting investors will have to live with. I would rather miss a few points of upside in order to avoid significant points on the downside.
Historically, Apple’s stock is volatile, which makes a pullback likely at some point in the next few months.
A 7% to 10% correction would be needed for me to get interested.
Bret Kenwell is the manager and author of Future Blue Chips. As of this writing, Bret Kenwell held no position in any securities mentioned.