Warren Buffett Has Invested $2.9 Billion in His Favorite Stock This Year (Hint: Not Apple)

In 1962, Warren Buffett began buying stock in a textile manufacturing company called Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) . In 1965, he assumed control of the New England operation and began using it as a holding company to acquire other businesses and buy stocks.

Under his leadership, Berkshire shares have returned 20% annually for nearly six decades, roughly doubling the gains in the S&P 500 (SNPINDEX: ^GSPC) . Meanwhile, Buffett has amassed a personal fortune of $150 billion. Those accomplishments make him one of the best investors in American history.

Today, Buffett reportedly manages about 90% of Berkshire's stock portfolio, including the largest positions, while fellow investment managers Todd Combs and Ted Weschler handle the rest. Buffett can also repurchase Berkshire stock when he believes it trades at a discount to its intrinsic value.

With that in mind, Buffett made two important capital allocation decisions in the first half of 2024:

• He sold 505 million shares of Apple (NASDAQ: AAPL) , slashing Berkshire's stake by more than 50%.
• He repurchased $2.9 billion in Berkshire stock, meaning shares were undervalued in his estimation.

Importantly, Buffett has repurchased Berkshire stock every quarter for six consecutive years, spending a cumulative total of $78 billion on buybacks during that period. He also has 99% of his net worth invested in the company -- I am not talking about Berkshire's portfolio but rather Buffett's personal wealth. That makes a compelling case for Berkshire being his favorite stock.

Here's what investors should know about Apple and Berkshire.

1. Apple

Apple has cultivated brand authority by pairing appealing hardware with proprietary software to create a user experience for which consumers willingly pay a premium. The average iPhone costs more than twice as much as the average Android smartphone, and Apple dominates the smartphone market in terms of revenue share. It is also the market leader in digital tablets and smartwatches outside of China and the fourth-largest personal computer manufacturer by shipment volume.

However, the Apple innovation engine seems to be losing momentum. The company introduced the iPhone, iPad, and Apple Watch over a nine-year period that ended in 2015, but Apple has not launched a new viral product since AirPods hit the market in 2017. Furthermore, iPhones account for about 45% of total revenue, but iPhone sales have yet to top the record $71.6 billion from the first quarter of 2021.

In short, Apple's long-term growth prospects in hardware are less than compelling, even though many analysts expect a massive upgrade cycle following the launch of Apple Intelligence, a suite of generative artificial intelligence (AI) features for iPhones and MacBooks expected in October. That means future revenue growth heavily depends on services like advertising, Apple Pay, the App Store, and iCloud storage.

However, services account for less than 30% of total revenue, so that segment can only move the needle slowly. That's a problem because Apple stock is priced for robust growth. Shares currently trade at 33.6 times earnings. Meanwhile, Wall Street expects earnings to increase at 8.6% annually over the next three years. Those figures give a price/earnings-to-growth ratio (PEG ratio) of 3.9, a significant premium to the three-year average of 2.6. At that price, Apple looks overvalued.

Personally, I would avoid this stock, and (like Buffett) I would consider trimming my position if I were sitting on profits.

2. Berkshire Hathaway

Berkshire Hathaway is the largest insurance company in the world as measured by float, a term referring to money an insurer holds between the time customers pay premiums and make claims. Due to disciplined underwriting, Berkshire has paid less than nothing to accumulate float, and Warren Buffett has invested those funds very effectively.

Berkshire Hathaway had over $250 billion in fixed-income securities (bonds and Treasury bills), $285 billion in equity securities (stocks), and $40 billion in cash on its balance sheet as of the quarter ending in June. The sum of those invested assets has climbed steadily higher. In fact, Berkshire's book value per share -- a good yardstick for changes in intrinsic value -- increased at 11.3% annually over the last decade, outpacing the annual gain of 10.8% in the S&P 500.

Buffett has also used insurance float to purchase dozens of subsidiaries that span the gamut of the U.S. economy, from energy and utilities to manufacturing and retail. Berkshire even owns freight railway Burlington North Santa Fe, which occupies a critical link in the domestic supply chain. Importantly, because those subsidiaries were generally vetted by Buffett, we can assume they met his standards for having a durable economic moat .

That means Berkshire is a collection of above-average businesses that operate across a diverse range of industries. Those qualities make the company resilient during economic downturns. Since 1980, Berkshire stock has outperformed the S&P 500 by a median of 4.4 percentage points during recessions , according to Bespoke Investment Group.

Wall Street expects Berkshire to grow operating earnings (which excludes investment gains and losses) at 18% annually through 2027. That estimate makes the current valuation of 23.5 times operating earnings look reasonable. Investors, especially those worried about an economic downturn in the near future, should consider buying a small position in this stock today.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy .