By Nicole Friedman and Chris Dieterich 

Warren Buffett loves to say, "If there's lots of technology, we won't understand it." But even he sees reasons to buy Apple Inc.

Berkshire Hathaway Inc., Mr. Buffett's conglomerate, more than doubled its Apple stake in early January and now owns about 133 million shares, or 2.5% of total shares outstanding, Mr. Buffett said Monday on CNBC. Apple is now one of Berkshire's largest equity holdings.

Apple, near its all-time high at just over $137 a share, a level that makes it the most valuable U.S. public company by a margin of more than $100 billion, isn't cheap by some standards. At that price, Berkshire's stake is worth about $18 billion.

But it checks many of the boxes of Mr. Buffett's biggest investments: a strong brand name, a relatively low valuation and consistent share buybacks and dividends. Mr. Buffett has long said that it is better to buy great businesses at fair prices than fair businesses on the cheap.

What's more, the investment demonstrates Mr. Buffett's longstanding conviction that a well-run company relevant to a large and dedicated customer base can transcend traditional investment thinking centering on concepts such as "growth" and "value."

Apple's price/earnings ratio is 14.6 based on analysts' earnings estimates for the next year, according to FactSet. That is up from slightly under 12 before the election but well below the broader market and even relative to other technology shares. The forward P/E of the S&P 500 is 17.9, while tech stocks in the S&P 500 sport a forward P/E of 18.59.

In addition, Berkshire needs to make increasingly large bets to move the needle on its results. The conglomerate had $86 billion of cash at year-end, and its net earnings were flat in 2016.

Berkshire spent $20 billion buying stocks since just before the November presidential election, partly as a way for the company to put its cash to work, Mr. Buffett said.

"We had the money, and I like investing," he said on CNBC. "I would so much rather have that than have the money in Treasury bills."

Mr. Buffett started studying Apple after one of his portfolio managers -- he didn't say whether it was Ted Weschler or Todd Combs -- invested in the stock. Each manager oversees about $10.5 billion for Berkshire.

Mr. Buffett has traditionally shied away from tech stocks, saying that he doesn't understand the business, but he says Apple is a consumer product that he understands.

Mr. Buffett used investor Philip Fisher's "scuttlebutt" method of doing on-the-ground research to learn about a company, he told CNBC. He queried his great-grandchildren and their friends about how they use their iPhones.

"The degree to which their lives center around it is huge," he told CNBC.

Apple is classified as both a growth and a value stock in certain popular index-tracking exchange-traded funds. For instance, Apple is the largest holding in the $16 billion iShares S&P 500 Growth ETF, which filters companies by sales and earnings, among other things. At the same time, Apple is the largest holding in the $2.5 billion iShares Edge MSCI USA Value Factor ETF, which filters the market by metrics including price-to-book valuation, a measure of a company's reported net worth.

"There's all this cash that they're generating, and the company is likely to maintain the aggressive pace of returns to shareholders," said Daniel Flax, an analyst at fund company Neuberger Berman. "There are so many elements of the story that could appeal to different investor classes."

Another aspect of Apple's appeal is how it returns cash to shareholders in the form of quarterly dividends and share repurchases. Apple ended last year with $246 billion in cash, including $185.6 billion in long-term marketable securities.

Apple in 2012 began to pay shareholders a quarterly dividend for the first time since 1995. Apple spent $10.9 billion in the final three months of 2016 on buying back its own shares, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Berkshire bought its first 61 million shares of Apple in 2016 at an average price of $110.17, the company revealed in its annual report released Saturday. The company more than doubled that purchase in January before Apple released its quarterly earnings, Mr. Buffett told CNBC.

"He should have bought it sooner," said Jeff Matthews, a hedge-fund manager who has written books on Berkshire. But like when Mr. Buffett first bought Coca-Cola Co. in the 1980s, "he's betting that what he's paying now will many years from now look like a very cheap price."

Apple shares have climbed 18% this year, closing at $136.93 on Monday.

"It's at a price different than I would buy it now," Mr. Buffett told CNBC. But "we're certainly not selling."

Write to Nicole Friedman at nicole.friedman@wsj.com and Chris Dieterich at chris.dieterich@wsj.com

 

(END) Dow Jones Newswires

February 27, 2017 17:17 ET (22:17 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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