Last week I wrote about buying a pull-back from recent highs. Here I will discuss buying a mega pull-back. In a bid to learn from the best, I studied the Berkshire Hathaway entry setup for Apple. Naturally, I only looked at the technical set up from the charts, since I have no idea what factors were actually used to enter the position. Was the purchase a pure value play, or simply buying growth at a reasonable price? If you are interested, you will find a lot written about the fundamental factors used in Warren Buffet's decisions, but I have found no technical analysis of his entry process. Of course, if you have seen technical analysis of his entries, I would love to hear from you.
Was the Berkshire purchase of Apple a pure value play or an example of buying growth at a reasonable price?
A fine discussion of the Warren Buffet Method is found in a book by Mary Buffet and David Clark, "The New Buffetology". So much has been written about value investing, that you are best off doing a search and looking up the many links that pop up.
The Apple Investment
Long-term devotees of Warren Buffet were surprised to learn in May, 2016 that he had invested in tech giant Apple during the first quarter of 2016. Many speculated the entry was by two of his in-house value managers, and not by Buffet himself. This occurred at a time when Apple had pulled back from all-time highs, iPhone sales were stalling, Apple was returning cash to shareholders via dividends and stock repurchases, and with its huge cash cushion, analysts were wondering if Apple has ceased to be a bona fide growth stock. The position was initiated in the first quarter of 2016 (see Chart 1), at an average price of about $109, and others report an entry price range from $93 to $110.
Chart 1: The Berkshire Hathaway Apple position was initiated in the the first quarter of 2016 at an average price of about $109, and prices reportedly ranged from $93 to $110. Note that this chart has back-adjusted prices, and may differ slightly from the actual live prices during 2016.
The Value Case
Apple stock had retreated some 30 percent off its highs, and conventional value measures were at the lowest level since 2014 with a price-earnings ratio near 10 and price-sales ratio near 2.2 or so, well below the ratios for the S&P 500 index. So, at least on the face of it, the stock offered "good value", whatever that meant to the Berkshire decision makers. Apple also had a huge cash cushion, massive gross margins for a sustainable earnings "moat", and a fanatical user base to support future earnings projections.
Technical Analysis of the Apple Entry
Note that Apple had come down into solid technical support, with the resistance at its prior high in 2012 now providing support, and this level had been tested multiple times (see Chart 2). This would be a true counter-trend entry if you actually bought the lows around 90. Berkshire reportedly had fills ranging from $93 on up, so one could argue they had a true counter-trend entry near long-term chart support.
In more conventional terms, a look at the weekly data shows a bounce to the 110 area (see Chart 2) in Q1 2016, followed by a retest at 90. Hence, a breakout above 110 later in 2016 would be a fairly conventional technical entry. Since Apple then pulled back to re-test the breakout at 110 after the initial breakout, this area clearly passed the usual technical entry criteria coming off long-term support. Hence, a conventional technical analysis would have also produced an average price of 110, near the average price reported for the initial position put on by Buffet's managers in the first quarter of 2016
Chart 2: A standard technical analysis based entry of a breakout above 110 or during the re-test of 110 would have produced an average price not too far from the reported initial average Berkshire Hathaway price of $109.
The Berkshire Hathaway entry into Apple was preceded by significant declines in Apple, and came during or after a retest of key chart support areas. Conventional technical analysis entries of a breakout above the first bounce provided entry prices comparable to the Berkshire average price reported in the media.
So you will have to decide for yourself if the Apple purchase was a pure value play, merely a counter-trend entry at key support, or perhaps some combination of both.
The take away is to consider buying into weakness in a house-hold name, either near a major support, or on a breakout over a six to nine month high after multiple tests of that support.
Let me know why you think Berkshire bought Apple. In the meanwhile, please subscribe to my blog using the link below. Enjoy!