Recently, Buffett purchased nearly 4 million shares in the second quarter $Apple (AAPL.US)$ Among his top five holdings, after increasing his stake by 3.9 million shares, Apple (AAPL) remains at the top—truly Buffett’s favorite. Looking at Apple's stock price, even though it has been a volatile year with widespread pullbacks in tech stocks, Apple is only down 2% year-to-date compared to $Alphabet-A (GOOGL.US)$ $Meta Platforms (META.US)$ These tech stocks, it’s impressive! $Berkshire Hathaway-A (BRK.A.US)$
Therefore, I’m very interested in exploring the logic behind Buffett's investment in Apple.
1. Buffett’s Stock Selection Criteria
Criterion 1: ROE
In 'Buffett's Letters to Shareholders,' he mentioned that if he had to choose one indicator for stock selection, he would use Return on Equity (ROE). He said companies that can consistently maintain an ROE above 15% are good companies and worth considering for purchase. Companies with an ROE exceeding 30% are rare.
As we all know, Return on Equity (ROE) is the product of net profit margin, asset turnover, and financial leverage. Generally speaking, ROE driven by improvements in net profit margin and turnover is of better quality, whereas ROE boosted by financial leverage carries some risks and may be of lower quality (though not always). In terms of stock selection, ROE is closely related to Price-to-Book (PB) ratio. Simply put, only high ROE can justify a high PB.
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