Buffett's Bumpy Ride With IBM Draws to a Close With Stock Sales

(Bloomberg) -- Warren Buffett is just about done with International Business Machines Corp.

His conglomerate, Berkshire Hathaway Inc., reported that it cut its stake in Big Blue by 94 percent during the fourth quarter, essentially drawing to a close a rare blemish on his investing record.

The move was disclosed in a regulatory filing Wednesday that also showed Omaha, Nebraska-based Berkshire increased its investment in Apple Inc., now valued at nearly $28 billion. And it initiated a new holding in Teva Pharmaceutical Industries Ltd., worth about $365 million, in the final three months of last year.

IBM was always a curiosity for Buffett followers. He’d spent years telling them that technology companies were outside his area of expertise then plowed more than $10 billion into the company in 2011.

Flawed Valuation

Back then, Buffett’s investment was a huge vote of confidence for the aging computer-services firm and its leadership. But things soon went south. IBM struggled with declining sales, forcing Buffett to defend the pick. For awhile, he even added some to his holdings.

Last year, however, he’d had enough. Just before Berkshire’s annual meeting in May, he acknowledged that his valuation had been flawed and that he’d begun to cut back on the investment.

Buffett had hinted he might sell additional IBM shares before the end of last year. Since some of the stock traded below his purchase price, it would have been advantageous for Berkshire to recognize a loss when tax rates were higher, he said this January. Berkshire’s stake in the company stood at just 2 million shares at the end of December, which have a market value of about $309 million.

Missed Opportunities

The episode has highlighted just how badly Buffett missed opportunities in tech companies that have come to dominate the ranks of the world’s most valuable enterprises. At the annual meeting, he issued a mea culpa, adding that he “blew it” by failing to invest early in Google despite having plenty of chances to learn about and understand its business model.

In a sign of his new thinking, Buffett plowed billions of dollars into Apple starting in 2016. He added more to that investment in the fourth quarter, boosting Berkshire’s total stake in the iPhone maker by 23 percent to about 165 million shares.

While much smaller, Berkshire’s new investment in Teva may capture investor attention. The drugmaker has lost more than two-thirds of its value in the last two years. New Chief Executive Officer Kare Schultz has been making major changes since taking over in November. He’s told investors to brace for an ugly ride that won’t be over this year, and gave a 2018 earnings forecast far below investors’ expectations.

To clean up some of the company’s more than $30 billion in debt, Schultz said he’ll cut about 25 percent of jobs at the company -- a step that past CEOs have been unwilling to take given Teva’s close ties to its home market in Israel. He’s also reorganized the drugmaker’s management, and said it will eliminate some money-losing products.

After Berkshire’s new holding was disclosed, Teva’s American Depository Receipts surged 8 percent.

Some other notable changes to Berkshire’s portfolio:

• The stake in Bank of New York Mellon Corp. climbed 21 percent to 60.8 million shares
• The holding in Monsanto Co. rose 32 percent to 11.7 million shares
• The holding in American Airlines Group Inc. was lowered by 1 million shares to 46 million.

--With assistance from Drew Armstrong

To contact the reporters on this story: Noah Buhayar in Los Angeles at nbuhayar@bloomberg.net, Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski, Alan Mirabella

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