Apple Stock and Warren Buffett – Full Disclosure

Apple Stock and Warren Buffett – Full Disclosure
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Apple Inc. (NASDAQ:AAPL) Stock and Warren Buffett – Full Disclosure

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Back in May I was writing on this blog that the market was unduly pessimistic regarding Apple. While Apple faced challenges, to rationalize the market price in a discounted flow model required projecting permanently falling earnings. Like any good investor, I put my money where my mouth was and took what for my fund was a very large position in Apple. I was so bullish then that I even penned an email to Warren Buffett (I had his email because I had done consulting work for Berkshire) recommending that Berkshire consider the stock. The email read as follows:

May 3, 2016

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You might cast your eye on Apple. If it can maintain its earnings, even in nominal terms, it is a long-term bargain. As to Apple's "moat" it is not just around the iPhone but the entire ecosystem including the software, brand names and the stores. Plus it is certainly an "elephant" so that Berkshire could buy as much as it wanted without significantly moving the market price.

Warren Bradford Cornell

PS. I have what for me is a meaningful position in Apple. Also my suggestion is only for prices below $100.

A little over two weeks later, it became public that Berkshire had purchased $1 billion of Apple stock. Two months later it was announced that Bershire's holding had increased to $1.5 billion. To be fair, I doubt my email had any impact on either decision. In fact, it is very unlikely that Mr. Buffett ever read it. Nonetheless, I was thankful for Berkshires purchases both of which, on announcement, were associated with increases in the price of Apple stock.

When I penned the email and wrote my posts on Apple, the stock was in the low 90s. Since then two things have happened. First, the stock has risen sharply - closing today at 109.08. Second, my forecast of future cash flows has actually fallen in the past two months. The reason for the drop in my forecast is the growing storm of speculation that the iPhone 7 will only be a modest upgrade. If this is true, it reflects both a short-term and a long-term problem. The short-term problem is that earnings for the next year may not bounce back as many analysts have projected. But it is the long-term problem that worries me. Does Apple have the management and the culture necessary for it to remain an innovative leader? This has been a constant concern that has ebbed and flowed since the passing of Steve Jobs. For me, the iPhone 7 issue is a bad sign. So bad that today I liquidated the entire Apple position I was holding. I may be kicking myself when new products are announced in the fall, but on a risk return basis I could no longer justify holding the stock at a price close to $110. I guess I owe Mr. Buffett another email.


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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.
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