Investing Like Warren Buffett: What You Can Learn From Billionaire's Apple Bet

The stock market has recovered nicely this year, although abounding uncertainties and risks question the sustainability of the uptrend.
Against this backdrop, Doug Clinton, the managing partner at Deepwater Asset Management, delved into what it would take to generate great returns.

What Happened: “Great returns come from consistently buying assets for what turns out to be cheap prices,” Clinton said. Instead of calling the bottom, an investor should take time to identify asses that would turn out to be cheap at the hindsight, he added.

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This, in other words, is value investing — a strategy that is central to billionaire investor Warren Buffett’s investment thesis. Clinton took up Buffett’s bet in Apple Inc. AAPL as a case study to back his view.

Buffett’s Apple Bite: The “Oracle Of Omaha” first invested in Apple in mid-2016 when the stock was down over 25%, Clinton noted. The weakness was due to a disappointing iPhone 6S upgrade cycle and the precipitous drop in “S” cycle sales in China, he said.

The weakness proved irresistible for Buffett, who took stock of the company’s over $150 billion in net cash, commitment toward buyback and robust free cash flow yield, he added.

“Free cash flow yield + growth rate = return,” is the equation used by investment greats, including Buffett, Charlie Munger and Glenn Greenberg, Clinton noted. They targeted companies that had free cash flow yield + growth rate equal to 20% or move, he added.

Buffett saw the issues Apple was facing in 2016 as transitory, as he knew people would continue to use iPhones even if it means less frequently upgrading and Cupertino will keep generating strong free cash flow that would grow in single-digit range even in the bear-case scenario, Clinton said.

As Buffett foresaw, Apple stock has run up about four times from the levels Buffett bought in just six years, Clinton added.

Buffett’s Rich Haul: As Buffett expected, Apple’s iPhone sales grew out of the 2016 slackness and Services revenue began to make up a significant portion of the total, Clinton said. The stock also received support from market multiples expanding for all big tech companies, he added.

Over and above this, Apple returned about $490 billion, in the form of dividends and repurchases since 2016, nearly equivalent to its market cap of $550 billion in 2016, he noted.

“It’s hard to see a losing scenario when a company returns cash equivalent to its market cap in short order and sustains a strong ongoing business even after that return. That’s a can’t miss,” Clinton said.

Getting paid back in a public investment necessarily doesn’t mean returning capital like Apple but it can be from the company eventually generating free cash flow equivalent to the market cap at the time of purchase, the analyst said.

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