Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett once referred in 2020 to Apple (NASDAQ: AAPL) as Berkshire's third business, following its insurance arm and the BNSF railroad. However, that may not be the case for much longer.
The Buffett-led conglomerate unwound a large chunk of its stake in the iPhone maker in the second quarter, the company revealed in its recent earnings report. Berkshire cut 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 soared by 23% during the second quarter. If you assume the sale came toward the end of the quarter, Berkshire dumped roughly half of its Apple shares. Berkshire had begun selling Apple in the first quarter, and the value of its stake in the tech giant is down 56% from the end of 2023, when it was worth $174.3 billion.
Why did Berkshire dump so much of its Apple stake after Buffett had trumpeted the company's praises so many times? There's no clear answer to that question, but I can make several educated guesses, based on Buffett's past behavior and Berkshire's historical patterns. Here's a closer look.
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1. Tax management
After Berkshire's 13-F filing in May showed that the company had sold more than 116 million shares of Apple, cutting its stake by 13%, Buffett addressed the move at the annual shareholder meeting in May. He implied that the sale was to hedge any risk of capital gains tax rates going up, telling his audience: "If I'm doing it [paying capital gains tax] at 21% this year and we're doing it a little higher percentage later on, I don't think you'll actually mind the fact we sold a little Apple this year."
Buffett was referring to talk in Washington about the capital gains tax rate going up, though there are no specific plans to raise it. However, it's possible that Berkshire continued to sell Apple in the second quarter for the same tax-motivated reason, though there's been no progress in raising the capital gains tax rate recently.
2. Valuation
Buffett hasn't made a specific comment on Apple's valuation, but has bemoaned pricey valuations in the stock market at times and seems to believe prices are stretched again.
And Apple stock has gotten expensive. It finished the quarter with a price-to-earnings ratio above 32, reaching its highest level since the early days of the pandemic, when its growth soared, driven by remote work and school and the need for new devices.
By comparison, Apple's growth has slowed considerably since then, with revenue up 4% in its most recent quarter. Under those circumstances, Berkshire's trimming its ownership of Apple would make sense, though it's unclear if the sale was motivated by valuation.
3. Raising cash
Another plausible reason for Berkshire to sell Apple is to raise cash, perhaps to buy a different stock or make an outright acquisition. In Berkshire's May shareholder letter, Buffett did refer to the company's ability to capitalize on market sell-offs as "our not-so-secret weapon." In order to do use that weapon, Berkshire needs cash on hand to be able to buy discounted stocks and businesses. In that regard, selling Apple, by far Berkshire's largest holding, makes sense.
The sale helped Berkshire beef up its cash hoard, as the company finished the second quarter with $272 billion in cash, cash equivalents, and short-term Treasury bills. That's up substantially from $163 billion at the start of the year.
It's possible that Buffett and his Berkshire management team have been preparing for a market sell-off, and it seems like they've been rewarded with one. The S&P 500 gave up 6% over a three-day span ending on Monday.
What's also notable is that Berkshire hasn't significantly reduced any of its other top-five holdings, though it has been selling some Bank of America stock recently. That indicates there may be more than raising cash behind the Apple stock sales.
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 buys and sells.
Apple still remains Berkshire's biggest holding after the second quarter and could certainly stay that way, so the sale may have been driven by rebalancing as well as other portfolio management guidelines. It's also possible that Apple's valuation or slowing growth contributed to the sale.
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 lauded the company on several occasions.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy .
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