Not only has Warren Buffett bought more Apple stock, he has been promoting the purchase with full force. Apple’s stock, as a result, has jumped.
The day before the news of Buffett’s Berkshire Hathaway BRK.B, -0.18% buying more Apple AAPL, +0.12% stock broke (May 4), I wrote a column titled “There’s evidence that Apple’s stock could finally break out.”
No, Buffett did not call me before he unveiled the news. It is simply that I have been reading charts for over 30 years and can understand stock patterns. Furthermore, algorithms at The Arora Report showed several times during the first quarter that the smart money (professional investors) was buying Apple.
Read: Four Warren Buffett mistakes that can make you a better investor
Investors are buying Apple stock hand over fist after Buffett revealed his additional purchases. But before you jump into Apple stock now, consider five points that may give pause, even to Buffett admirers like me. Let’s start with a chart.
Chart
Please click here for an annotated chart of Apple. For the sake of full transparency, this is exactly the same chart, without any changes, that was published the day before Buffett’s announcement. Please note the following from the chart:
• During the first quarter, Apple traded as low as $155.03 and appears to have traded close to $150 during the time outside regular trading hours.
• Buffett did not buy Apple stock around $185 but likely much lower.
• Buffett is already sitting on a nice gain on his newly bought Apple stock. The more he talks about Apple stock, the bigger his gain gets. Buffett, in other words, is talking up his own book.
• The chart shows that the volume during the period Buffett bought Apple stock was low. In the low-volume environment, it appears that about one in 10 shares were bought by Buffett or by Apple. Apple has an active share-repurchase program in place.
• Without buying by Buffett and Apple, Apple stock would likely have not rallied and may have even declined.
• Not shown on the chart (because it has been left unchanged for full transparency), but discernable from the chart, is the $171.48 level. This is the average price that Apple appears to have paid for the shares that it bought.
• The horizontal resistance line shown on the chart has been broken but not decisively.
• The resistance shown on the chart formed by the upper trend line has been touched but not decisively broken.
• The chart shows that, periodically, Apple does pull back. Usually a pullback happens after extreme euphoria — like what’s happening now. A case in point is in 2012, when Apple stock topped $100 and The Arora Report gave a signal to sell some shares, which turned out to be the exact top. Subsequently Apple stock lost about half of its value. The signal saved many investors a lot of heartache and enabled them to add the stock again at one-half of the price. Please see “Smart money selling Apple.” Such an extreme drop in Apple stock is not likely in the near future because of the massive buyback program of its own stock by Apple. However, smaller dips are part of the natural process.
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10-fold return
Going forward, Apple is not likely to provide the kind of return it has provided in the past. For example, the original position of The Arora Report is from $18.73 and now there is 889% return on that. There are opportunities other than Apple that may provide similar large returns going forward.
Diversification
Buffett holds only one tech stock and that is Apple. Buffett has sold his IBM IBM, -0.17% position. Most investors are well-advised to diversify their technology holdings. Many investors are already overly concentrated in tech stocks such as Amazon AMZN, -0.51% Facebook FB, -0.22% Google GOOG, -0.35% GOOGL, -0.34% and Microsoft MSFT, -0.44%
Time horizon
Buffett can afford to sit on Apple stock forever. This is not the case for most investors. Individual investors often have personal reasons to sell in a time frame that is shorter than Buffett’s. Institutional investors often sell because of diversification reasons, withdrawals and attempts to keep up with benchmarks.
Move the needle
Buffett has lots of cash. To move the needle, he needs to buy massive quantities of a large-cap stock such as Apple. Most investors do not have the problem of “too much cash” as Buffett does.
Apple bull
Relax, Apple fans, I am an Apple bull. During Apple’s rise, I have had some of the highest targets for Apple and I have been repeatedly proven right. When we bought Apple at $18.73, I was talking about the scenario of Apple going to $143. This call was made long before Apple became a popular stock. Many called it outrageous; some even canceled their subscriptions to The Arora Report.
Last year I wrote, “Apple’s stock could double on the ‘mother of all artificial-intelligence projects.’” At that time nobody was talking about such a bullish scenario.
Apple coming close to $200 is now a reality. Well in advance, last year I wrote, “These three catalysts will push Apple’s stock to over $200.”
What to do now
At The Arora Report we recognize that all investors are different. For this reason we provide several ways to invest including the “good way” and the “best way.” In the “good way,” our buy now rating on Apple is a “yes.” However, our methodology calls for buying very little and scaling in on dips. For the “best way,” our methodology calls for waiting patiently for a dip into the buy zone. Further, we have doubled long-term returns by trading around a long-term core position with shorter-term positions.
Those already holding Apple stock may consider continuing to hold. Here is an example of how accurate my calls on catching Apples dips have been based on the six screens of the ZYX Change Method. Please see “This is (probably) how low Apple’s stock will go.” This column was written at a time when there was a lot of negativity about Apple and many gurus were predicting Apple to go much lower. At the time of the call, Apple was trading at $164. The call was that Apple could fall to $148 and that would be a buying opportunity. Well, Apple fell to $149.13 and rebounded. The reason I am mentioning this is to show Apple stock bulls that even bulls ought to consider various factors and not blindly follow Buffett unless you have resources and time frames like Buffett does.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.