It may seem like a bit much that a legendary company like Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), led by Warren Buffett, might change its investing strategy solely based on who is in the Oval Office, but he has already given a fairly clear answer on this subject. If there is such a change in strategy, it would be based on just one thing: taxes.
If Vice President Kamala Harris had won the presidency, there was a fairly high likelihood that the corporate tax rate would have been increased from its current 21%. Now that Donald Trump has won, the tax rate will almost certainly stay at most at the current 21% rate. So, how does that change Berkshire Hathaway’s investing strategy? It may not be in profit-taking mode anymore.
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The biggest insights into Buffett’s investing strategy have come from two places: his annual shareholder letter and Berkshire’s annual conference. In 2024, Buffett gave investors an idea of why the conglomerate was selling one of its biggest winners and largest holdings, Apple (NASDAQ: AAPL). Berkshire has steadily sold off its huge stake in the business fairly consistently since the third quarter of 2023 and is sitting on a nice return.
However, with how much praise Buffett has given the company in the past, plus his strategy of letting his best holdings run, this shift started to sound alarm bells among investors. To quell those fears, Buffett told investors the sales were occurring because of an impending rise in the corporate tax rate. Buffett said at the meeting: “We don’t mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we’re taking in Apple. And that rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating.”
However, with Trump in office and the House and Senate controlled by Republicans, the threat of higher taxes is no longer on the table. With that in mind, it would seem like Berkshire will likely quit selling Apple stock. But I don’t see that happening.
Although this seems like a great reason to sell on the surface, Buffett is also sitting on large gains from other investments in his portfolio and in most cases he isn’t taking those gains.
Instead, I think he’s selling Apple for a different reason, and nothing a Trump administration does will stop Berkshire from selling off more Apple stock.
Buffett is a longtime value investor. At their core, value investors buy a stock that is undervalued, then sell it when it achieves full valuation. When Buffett and Berkshire first bought Apple stock, it traded for about 10.6 times trailing earnings.
That was a cheap price for a company making a product millions of people utilize. However, Apple now trades at 39 times earnings, far above its historical average.
Yet the stock price has significantly risen since the start of 2023. These two things don’t add up and lead me to believe that Apple’s stock is significantly overvalued. Buffett and his team have access to the same information and likely believe the same thing. As a result, they’re selling the stock.
We’ll have confirmation on this thesis after Berkshire’s fourth-quarter trades are released, as a significant decrease in its Apple stock holdings would indicate that it’s not related to taxes but valuation. I’m confident that these sales will continue, and investors holding Apple stock now might think about selling some, as Apple’s business hasn’t grown very much for the past two years, and a correction may be imminent.
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Keithen Drury 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.
