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Apple Remains a Warren Buffett Favorite, Berkshire Ups Stake

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Apple Inc. (AAPL - Free Report) continues to find favor with Warren Buffett. Per a recent regulatory filing with the Securities and Exchange Commission (SEC), Buffett led conglomerate Berkshire Hathaway Inc. (BRK.B - Free Report) disclosed that it has increased its stake in Apple in the third quarter of 2017.

Berkshire revealed in the filing that it has bought around 3.9 million of Apple shares, taking its total share count to over 134 million.

Berkshire has been raising its stake in the tech giant, ever since it made its first investment in May 2016. The firm had bought around 9.8 million of Apple shares at a price of $109 per share back then.

Buffett is a value investor as he mostly considers the intrinsic value (fair value of a stock calculated by its future earnings power) of a stock for making investment. His investment apart from value also includes understanding of the business, competitive advantages and a capable management.

Given this, Buffett has shied away from most technology companies, given the difficulty to understand the businesses. He so far has restricted himself to buying Apple and IBM Corp. (IBM - Free Report) stock.

However, subsequent to the rise in stake in Apple, Berkshire lowered its stake in IBM by 32% in the third quarter. Per Seeking Alpha, at the close of third-quarter 2017, in terms of magnitude, Berkshire’s top holdings were Wells Fargo, Kraft Heinz, Apple, Coca-Cola and Bank of America (BAC - Free Report) .

Notably, shares of Apple have gained 48% year to date, slightly outperforming the industry’s 46.9% rally.

Why is Buffett Interested in Apple?

Apple commands a strong user base with exceptional brand loyalty. It is widely perceived that Apple users refuse to switch to any other platform that isn’t running on iOS.

Moreover, per 24/7 Wall St. “100 Most Valuable Brands In The World” list, Apple is the most valuable brand in the world. We believe that no Android product enjoys such brand loyalty.

We note that Apple’s brand is something that gives it an edge over its competitors. Per Seeking Alpha, “Brand strength allows Apple to charge higher prices and enjoy higher margins for its 'premium' product.”

Reportedly, Apple’s spectacular results in the last quarter were backed by steady iPhone sales (higher average selling price was a big factor) along with a spurt in Services segment and a resurgent Macs and iPad business.

Notably, Apple returned about $11 billion through dividends and share repurchases in the last reported quarter. The company returned $234 billion to shareholders out of its $300 billion capital return program.

Moreover, Apple on its last conference call, declared a quarterly dividend of 63 cents per share, payable on Nov 16, 2017 to shareholders of record as of Nov 13. When Berkshire made its first investment in the company, Apple’s quarterly dividend was 57 cents per share.

Apple also provided a very encouraging outlook for the current quarter, which includes the holiday season, anticipating strong performance of its latest smartphone — iPhone X.

TechCrunch was quoted citing Canalys’s data that Apple has bypassed China’s Xiaomi to once again become the world’s top wearable producer, following the September launch of its third-generation Apple Watch.

However, stiff competition from cheaper Chinese handsets remains an overhang.

Zacks Rank

At present, Apple carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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