Tuesday, January 28, 2020

Alphabet hits $1 trillion market cap; Doug Kass on Berkshire Hathaway's investment in Apple; My experience with a 5G phone

By Whitney Tilson

1) Google's parent company Alphabet (GOOGL) became the fourth U.S. company – following Apple, Amazon, and Microsoft – to hit a $1 trillion market cap earlier this month (it has dipped slightly below that since then). For more on this, see this story in the New York Times: Which Company Just Hit $1 Trillion? Google It.

The company reports fourth-quarter earnings on Monday, and I expect another strong quarter. Alphabet continues to be one of my favorite big-cap stocks. It's not going to double in two years – that's what we look for in my Empire Investment Report newsletter, which you can learn more about right here – but I think it's a good bet to double in five years...

2) Following up on my analysis of Apple (AAPL) in Thursday's e-mail, my friend Doug Kass of Seabreeze Partners has given me permission to share his latest article, which gives a well-deserved hat tip to Berkshire Hathaway's (BRK-B) Warren Buffett, but also a warning to Apple shareholders:

  • [Warren Buffett's purchase of Apple] is also probably the greatest investment ever made of a publicly-listed company in history – in either profits in absolute dollar terms or whether based on a time-weighted percentage return
  • Berkshire Hathaway has made about $43 billion on its investment in Apple shares over a three year period – most of the gains have been made in the last 12 months
  • Berkshire's Apple investment is so large (measured against BRK's market value, shareholders equity and other investments) that we must ask whether it is prudent for Buffett to maintain such a sizable stake
  • The bottom line is that I believe Buffett will reduce his Apple holdings – and other investors may not look positively on such a move

"Too much of a good thing can be wonderful."
Mae West

Warren Buffett, who often quoted Mae West, has always believed in a concentrated portfolio, often stating that, "diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."

Berkshire's investment in Apple is a bold manifestation of his avoidance of portfolio diversification which has characterized his investing style for over five decades... it is the largest investment that Berkshire has ever made and, by far, the most profitable (on a time-adjusted or absolute dollar basis) of any investment portfolio position he has made.

On an initial investment of $36 billion, Berkshire has made approximately $43 billion. Almost all of that gain is unrealized and has been achieved in the last 12 months!

It can now be argued that, in both time (brief) and amount (huge), Berkshire Hathaway's purchase of more than 255 million Apple shares was the single greatest investment ever made of a publicly listed company in history and by far, the most consequential investment of a listed company that Buffett has ever made. That's saying a lot for the 89 year old Warren Buffett who has compounded money at almost a +20% annual rate of return over more than half a century!

However, given the sheer success (and size) of Buffett's investment in Apple, we must now question whether Berkshire Hathaway should or will sell a large portion of their Apple shares.

I believe he will.

Let me explain... but before I do, I first wanted to chronicle the history behind this enormously successful investment made by Berkshire Hathaway in Apple.

  • Berkshire Hathaway first disclosed the purchase of 9.8 million shares of Apple (at the time it was worth a bit more than $1 billion) in a 13F filing with the SEC on May 16, 2016. (Buffett later confirmed on CNBC that either Todd Combs or Ted Weschler – his two investment managers – made the investment).
  • Since the original 9.8 million share investment was disclosed, Warren Buffett piggybacked his managers and, by the end of 2018, Berkshire Hathaway owned 255.3 million shares at a cost of about $36 billion ($141/share).
  • In a 13F in late November 2018, Berkshire Hathaway announced it sold 2.9 million shares of Apple. At the time the sale was generally believed to have been sold by Todd or Ted in order to make room for some other investment.
  • In an interview with CNBC in February 2019 (following a first quarter warning and after a -20% share price drop from September 2018) Warren Buffett declared that Apple's shares were too expensive to purchase at the then current level of $175/share. ("If it were cheaper, we'd be buying it. We aren't buying it here.")
  • In a 13F in late November 2019, Berkshire Hathaway announced it sold an additional 750k shares of Apple.
  • Apple's shares closed at about $166/share on December 31, 2018 – providing an unrealized gain of approximately $4.2 billion.
  • Apple's shares closed at $300/share on December 31, 2019 – and the estimated unrealized gain grew to about $38 billion.
  • Apple's shares closed at $318/share last Friday – increasing the estimated unrealized gain to almost $43 billion.

By expressing enough confidence to make Apple (at a cost of $36 billion and by far its largest investment of a publicly held company), Berkshire Hathaway has reaped over $43 billion of gains. As less than four million shares have been reportedly sold, almost all of the gains are unrealized.

To the best of my knowledge this is the most substantial dollar return of any investment made by any entity of a publicly held company in history. It surely is the greatest time-adjusted return (with most of the gain achieved in the last 12-13 months).

Which brings us to the risks associated with how large Berkshire's Apple investment is relative to other investments, total Berkshire book value, etc.

At year end 2018, Berkshire Hathaway had over $40 billion committed to Apple's shares (with an unrealized gain of $4.2 billion) – compared to about $20 billion in long held positions in each of Bank of America (BAC), Wells Fargo (WFC), and Coca-Cola (KO). The unrealized gains in Bank of America and Wells Fargo are about $10 billion each and with Coca-Cola of about $17 billion.

But, Berkshire's gain in Apple has catapulted from $4.2 billion at the end of 2018 to over $43 billion today (as of Friday's closing price of $318/share) and the total investment value of its Apple holdings is about $80 billion, compared to its second largest portfolio holding (Bank of America, worth only about $30 billion).

The $80 billion marked to market investment in Apple is almost 15% of Berkshire Hathaway's market capitalization of $555 billion and represents 23% of Berkshire's [shareholders'] equity.

As measured against Berkshire's year end 2018 investment holdings, $80 billion in Apple shares would represent 46% of its $172 billion portfolio of 13 months ago. Assuming an estimated rise of about $55 billion in value of that total investment portfolio (with almost $40 billion from Apple's share price appreciation alone), Berkshire's Apple holdings likely represent approximately 35% of Berkshire's entire investment positions.

Put another way, it took Berkshire decades to realize [an] $18 billion unrealized gain on its $1.2 billion investment in 9.4% of Coca-Cola.

It took Berkshire only about one year to realize a $40 billion unrealized gain on its $36 billion investment in 5.4% of Apple!

Bottom Line

To me, Warren Buffett has put an [exclamation] point on his remarkable investing career with his spectacular investment in Apple.

Consider that The Oracle is currently 89 years old – and that he made his single best portfolio investment in over a half century at 87 years old!

This is truly amazing and testimony to his investing genius.

But, too much of a good thing (Apple) may no longer be wonderful for Berkshire Hathaway as the Apple position has a dramatically outsized size relative to a number of Berkshire metrics (market capitalization, shareholders equity and investment portfolio size).

For these reasons I say Berkshire will reduce its $80 billion invested in Apple – and that possible move may not be interpreted positively by other investors.

3) When my Samsung Galaxy Note 9 smartphone fell out of my pocket in December and was run over by a bus (see pictures here), I upgraded to the latest, greatest Samsung Galaxy Note 10+ 5G. As its name implies, it's capable of linking up to Verizon's new 5G network (for an extra $10 per month). Here's an article about it: What You Need to Know About 5G in 2020. Excerpt:

[Consumer Kathryn Schipper] is excited about the arrival of 5G, the fifth-generation wireless network that has been the subject of breathless speculation over the last few years. The new cellular standard, carriers have said, will reduce network congestion and pump out data so fast that smartphone users could download all the Avengers movies in a few minutes. It might even eventually help cars drive themselves.

"5G seems like orders-of-magnitude improvement," Ms. Schipper said. "I've also heard it's much more reliable, so that matters to me."

Yet the shift to 5G feels like a tech revolution happening in slow motion.

Unfortunately, however, the network hasn't been built out yet. So while I've found connections in New York City, Las Vegas, and Orlando, I'd estimate that I'm actually connected to the new network less than 1% of the time. It's really irritating to be charged for something that barely works, so I called Verizon to complain and they removed the extra charge for two months ($20).

But when it does work, it's incredible! Here are screenshots of the upload and download speeds on my phone with 5G (the top one) and without (bottom). As you can see, the 5G download speed is more than 20 times faster!

Best regards,


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Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

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