Apple: Time To Take Buffett’s Advice?

With Apple’s (NASDAQ:AAPL) stock etching out new and concerning lows — falling below the psychologically key level of $400 per share on Wednesday — it may be time for it to take some advice Warren Buffet gave late company co-founder Steve Jobs several years ago, back when its shares were trading much lower.

As Buffet said during his live “Ask Warren” appearance on CNBC’s SquawkBox, Apple can do four things with the $137 billion locked away in its cash stockpile: buy back stock, boost its dividend, make acquisitions, or sit on it. He made this observation to Jobs when he called to ask Buffett for guidance several years ago.

“It was an interesting conversation because I hadn’t talked to him in a long time,” recounted Buffett. “He said: ‘We’ve got all this cash. What should we do with it?’ So we went over the alternatives. It was kind of interesting.”

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The investing legend made this recommendation to Jobs. “I went through the logic of each thing,” said Buffett. “He told me they would not have the chance to make big acquisitions that would require lots of money… And then I asked him the question, I said .. ‘I would use it for buybacks if I thought my stock was undervalued.’ And I said, ‘How do you feel about that?’” The stock was trading around $200 per share at that time, and Jobs said he felt the stock was very undervalued…

Jobs eventually decided not to do anything with the money. “He just liked having the cash,” said Buffett. “It was very interesting to me because I later learned that he said I agreed with him to do nothing with the cash, he added. “He didn’t want to repurchase stock although he absolutely felt his stock was significantly underpriced at two-hundred and whatever it was then.”

But Buffett follows his own advice. He has said that Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) is worth at least 1.2 times its book value, and he has outlined plans to buy back Berkshire stock below that level.

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Research in financial economics suggests that now is the time for Apple to heed Buffett’s advice, as ValueWalk reported Friday. Stock price serve as signals for consumers as well as investors. For an investor, a collapsing stock price and a paltry price-to-earnings ratio shows that the market has little faith in the company’s future, and, similarly, consumers are often disinclined to buy a product from a company whose future is bleak. For example, as Dell (NASDAQ:DELL) continues to struggle to strengthen its business in the post-PC era, customers have lost confidence in its products. Collapses in consumer confidence can present huge problems for companies like Dell because as consumer confidence drops, prices fall, margins compress, and a vicious cycle begins.

For Apple, if management does not initiate a share buyback, it provides investors and customers with a negative signal; it informs them that the stock price is not “cheap,” even though shares may appear to be undervalued. “Management may choose to be secretive about Apple’s future products for strategic reasons, but there is no reason to be secretive about their confidence in the future of the company,” noted the publication.

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