Terry Smith tech-buying spree continues with Apple purchase

The star investor has been taking advantage of cheaper shares this year to increase his allocation to tech stocks.

Volatile stock markets this year keep throwing up investment opportunities for renowned “buy and hold” investor Terry Smith, who has revealed yet another new stock in his portfolio.

Smith, who runs the £22 billion Fundsmith Equity fund, disclosed in his latest update to investors a “small holding” in Apple, America’s largest company.

This continues his splurge on technology shares that have sold off sharply this year due to rising interest rates and worries about a recession.

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The FTSE All World Technology index has fallen 35% in dollar terms in 2022, and now has a price-to-earnings (p/e) ratio, which measures how expensive shares are relative to profits, of just 17. The de-rating means that tech shares are only slightly more expensive than US shares, as measured by the S&P 500’s p/e ratio of 15.  

Fundsmith Equity, a member of the interactive investor Super 60 investment ideas, also added creative software giant Adobe and Google-owner Alphabet shares for the first time this year, following on from buying Amazon (NASDAQ:AMZN) stock in summer 2021. Smith also owns Meta (formerly Facebook) and Microsoft, meaning that out of the FAANG stocks he is missing only Netflix. 

Apple shares have been a phenomenal investment. Now trading at $153 (£132), they changed hands for around $40 five years ago and close to $20 a decade ago.

Despite their increase in value, the p/e ratio is currently 25, which is not widely ahead of the US market. One year ago, Apple had a p/e ratio of 32, showing that Terry Smith waited for shares to fall and a cheaper valuation before investing. The company also pays a dividend and yields 0.6%.

The Apple earnings ratio has stayed relatively modest because of the growth in profits. Morningstar, a financial data firm, calculates that profits have risen 22% for the past three years, and its operating profit margin is 30%.

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Apple’s third-quarter earnings this year were strong, despite other big tech firms posting disappointing numbers. It set a record $90 billion in three-month revenue, which was up 8% on the same period in 2021.

Smith is not a dedicated technology investor, but pledges to “buy good companies” – those that have loyal customers, high profit margins and reliable growth. He says he refuses to overpay for such companies, tending to use periods of market weakness to initiate positions.

Smith is not shifting from his approach of buying “quality”, established companies that can consistently grow earnings and dominate their respective markets.

In his half-year update to investors, he said there was still no alternative to buying shares, given that inflation erodes the real income from bonds. He maintained that investing in high-quality businesses was the best approach.

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Smith said: “It may be tempting to sell equities and go into cash as this may enable you to avoid further falls in the equity market. Timing is of the essence in doing this and if you haven’t done it already, I think we can safely say you missed the top. Meanwhile, time spent in cash while waiting is hardly a good bolthole from inflation.”

Smith also revealed that he bought a stake in Otis, a US company that makes escalators and lifts, to replace his position in Kone, a similar Finnish company.