Apple and Trump
The Real Reason Behind Warren Buffett’s Bet in Apple (and in Trump)
Last week Carl Icahn announced that he no longer owned Apple. This move came as a shock to the markets. Yesterday, Warren Buffett announced he bought $1B of Apple stock. He explained this long position as a typical value play. Warren Buffett follows the value investing strategy taught by Ben Graham at Columbia. Graham was wildly popular at his era and endorsed Buffett when he retired from running a fund. It’s sort of what boosted Buffett’s popularity and got him a head start.
Apple’s last 12 month’s EBITDA was about $70B. Graham says to take this number, add adjustments for current assets and all liabilities, and divide it by a “cost of capital” to come up with is the “intrinsic value” of a company. Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.
There’s more to Buffett’s bet than value calculations a-la-Graham. It’s a bet that factors in the possibility that Trump would get elected and then get rid of the repatriation tax. This would bring over $2 trillion dollars back stateside and it is the unspoken reason why financiers like Carl Icahn and Andy Beal are backing Trump. There’s been no presidential candidate in the history who lost an election when reducing taxes was the clear message. George Bush JR is the perfect example. This tax elimination is one of the biggest ever in the history of the United States. And it would do wonders for Apple with their $180B overseas.
To this end, Buffett’s move into Apple is a no brainer. Also a no brainer for other billionaires to back Trump including the ones in Silicon Valley who are near and dear to us. Even if the value play doesn’t pay off, the odds of Trump’s election brings additional factor of safety into the bet. By how much, only Buffett knows.
The reason why Icahn sold his Apple shares is that even though there’s massive potential for profit, it’s no longer an activist play. His whole position was for Apple to bring the money back here but now that it may happen without his interference, he’s taken his $2B profit and he’s out. The stock just became a pure value play for Warren Buffett. This positioning tells us that both magnates think that Trump is to win the presidency.