Warren Buffett Just Bought $345 Million of His Favorite Stock (Hint: Not Apple)

Warren Buffett is one of the most revered investors on Wall Street. That's partly because he has amassed a personal fortune of $140 billion, but also because Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has grown at a phenomenal pace under his leadership.

The company's Class A stock has returned 20% annually since Buffett took control in 1965. Meanwhile, the S&P 500 (SNPINDEX: ^GSPC) has returned about 10% annually. Berkshire's outperformance boils down to prudent capital allocation decisions, and Buffett deserves much of the credit.

He has architected dozens of savvy acquisitions, made many prudent investments, and repurchased company stock in a manner that has undoubtedly created shareholder value. But two recent capital allocation decisions are worth exploring. In the June quarter, Buffett sold 389 million shares of Apple (NASDAQ: AAPL) and he bought $345 million worth of his favorite stock.

Here's what investors should know.

1. Apple

Berkshire first took a stake in Apple during the first quarter of 2016, and it became the biggest position in the company's portfolio by the fourth quarter of 2017. Many investors were initially surprised because Warren Buffett had famously avoided technology stocks for most of his career. But he has praised Apple CEO Tim Cook for his extraordinary management on several occasions, and Buffett recently said the iPhone "may be the greatest product of all time."

Apple still ranks as Berkshire's largest holding, and Buffett does not expect that to change this year. But his decision to sell 49% of the position in the June quarter raises questions, especially because he had already trimmed the position by 13% in the March quarter. Why would Buffett sell so much Apple stock when he clearly admires the company?

Earlier this year, Buffett was asked that question at Berkshire's annual meeting, and he attributed the decision to a probable increase in the corporate tax rate in the future. The U.S. federal government has run a historic deficit in recent years, and Buffett believes higher taxes will be used to remedy the situation at some point. In that scenario, Berkshire would pay more taxes on its earnings, and GAAP earnings include investment gains.

In other words, Buffett has been selling Apple stock this year so that Berkshire will not have to pay a higher tax rate on the investment gains in the future. That makes sense, but it raises another question: Why focus on Apple? If corporate taxes increase, Berkshire would owe the federal government a large slice of its investment gains on every stock. So, why is Buffett selling Apple so aggressively? The logical answer is valuation.