Buffett vs. Perry: Who’s Right at Apple?

Warren Buffett is legendary for having perhaps the greatest long-term investment performance in history. Michael Perry is legendary in its own right for shorting the housing market and banking before the 2008 financial crisis, immortalized in the movie The Big Short.

This week, major hedge funds released their Model 13F, which shows current buys, sells and holdings in their long portfolios as of the end of the first quarter. Perhaps the most interesting takeaway was Buffett, or at least someone in his group Berkshire Hathaway (BRK.A 1.60%) (BRK.B 1.72%)and bought more shares apple (AAPL 2.54%) Last quarter, despite already being Berkshire’s largest position. Meanwhile, Burry’s Scion Asset Management has made an important short bet against apple.

So who is right, and what conclusions can investors draw?

I’m more surprised Buffett is buying than selling wild

In the first quarter, Berkshire bought another 3.8 million shares of Apple. That sounds like a lot, but it’s a tiny amount compared to the 891 million Berkshire shares in total.

While Apple pulled back in the first quarter of 2022 along with the market, it’s still holding up relatively well and trading at a reasonable, if not outright cheap, valuation of 24 times earnings, even near today’s low prices. That valuation seems a bit high for Buffett to buy more shares. After all, Apple’s stock price is five times higher than it was when Berkshire first started buying the stock back in mid-2016.

This leads me to believe that the purchases could have been made by Todd Combs or Ted Wechsler, who both run smaller wallets in Berkshire. Most likely, it could be an investment by one of the pension funds in a company wholly owned by Berkshire. These purchases also appear in Berkshire documents.

Meanwhile, Burry’s bet on Apple wasn’t surprising, although perhaps surprising how big it was. In the first quarter, Burry bought put options with an underlying value of 206,000 shares of Apple. A put option gives its holder the right, but not the obligation, to sell a certain amount of stock at a certain price at a certain time.

The stocks underlying the options account for 17.9% of the long portion of Burry’s portfolio, and it is its largest position. Although we don’t know the strike prices or time frames of Burry’s put options, buying a put is a way to add leverage to his bearish bet. If Apple doesn’t drop below a certain price by then, the put options will expire worthless. Needless to say, Burry’s bet against Apple is much more aggressive, considering that the underlying value of the shares was the largest position in his portfolio.

Image source: Motley Fool.

Why is Apple short relative to other tech stocks?

It is not clear whether Burry chose Apple for reasons specific to Apple, or the fact that it is the largest company in the Middle East Nasdaq Composite. Heading into 2022, Apple would have held up much better than expensive software and Burry’s electric-vehicle stock that was short on last year. Late last year, Perry revealed a short bet against Tesla, among other expensive tech stocks. It was also a short-term Treasurer, in a bet that interest rates would rise.

Last June, Perry called the market and financial assets, in general, “the greatest speculative bubble of all time,” while also predicting the “mother of all crashes.” That seems to have been a wise call, as high-value growth stocks have been decimated as interest rates have risen sharply this year.

However, in downturns in the market it is usually the strongest “generals” like Apple who have fallen in the past, so Burry is probably betting that as other highly priced speculative stocks have already crashed, big tech stocks like Apple could be next. It should also be known that the 13Fs don’t reveal short bets, so Apple’s put option bet might not be Burry’s only bet against the market. Other stocks may be short.

But Burry isn’t against all technology, and Buffett seems to like other segments better than Apple these days

While Buffett has increased Berkshire’s bet on Apple, he clearly likes other sectors better these days. Berkshire recently increased its bets on oil stocks significantly, and also bought some banks, apparently betting on higher oil prices and interest rates.

Meanwhile, it is strange that Burry has also gone too far in other tech stocks, in particular the alphabetAnd ID padsAnd Reservation collectibles, in the first quarter. It looks like this could be a bet to shift away from buying electronic devices like iPhones and laptops to more trips and experiences. Booking Holdings is an online travel agency, and Alphabet said in its latest earnings call that travel searches have been strong. Meanwhile, Meta Platforms are getting very cheap after taking a dip after the fourth quarter report in February. Perhaps most importantly, each of these three tech stocks is cheaper than Apple on a forward price-to-earnings basis:

AAPL PE Ratio Chart (Forward)

AAPL PE ratio data (forward) by YCharts

Investors should stick to their long-term plan on Apple

While it’s interesting to note that two major investors are taking very opposite sides of popular stocks, it shouldn’t necessarily affect the way long-term investors should view Apple. Remember that Buffett is a long-term, long-term investor only, who won’t sever ties with Apple unless he believes its competitive advantages have waned, even if the stock is currently highly valued.

Meanwhile, Burry is a hedge fund manager who often makes deals. For example, in the last quarter, he sold five of his six positions in his long portfolio and bought 11 new positions. That’s a lot of trading, and it’s not really a long-term investment philosophy.

Therefore, it is possible that both are true. It appears that Burry was right in the short term, as Apple stock is down about 14% since the beginning of April. However, given how often Burry trades, it’s possible that he’s already sold these shows by now. But maybe not.

In the near term, Apple directed that its next quarter be affected by supply chain shortages. However, in the long run, its brand, sticky ecosystem, and cash-rich balance sheet make it a very solid stock. Therefore, shareholders should not necessarily dispose of their Apple stock based on Burry’s short, unless you need the cash in the near term. In the long run, Apple is still an excellent company, and it’s still Buffett’s biggest position.

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