The Oracle of Omaha has concentrated Berkshire’s investment portfolio in his best ideas.
Few if any money managers command the attention of professional and everyday investors quite like the “Oracle of Omaha,” Warren Buffett. Since becoming the CEO of Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.95%) in the mid-1960s, he’s overseen a cumulative return of more than 5,700,000% in his company’s Class A shares (BRK.A), as of the closing bell on Nov. 18.
Aside from crushing Wall Street’s benchmark index — the S&P 500 — in the return column over the long run, investors have come to appreciate Buffett’s open-book investment approach. During Berkshire Hathaway’s annual shareholder meetings, as well as in his annual letter to shareholders, Buffett candidly shares the traits he looks for in amazing businesses, as well as offers his thoughts on the U.S. economy.
However, the defining characteristic of Warren Buffett’s success has been his willingness to concentrate Berkshire Hathaway’s investment portfolio. Buffett and former right-hand man Charlie Munger, who passed away in November 2023, long believed that their top investment ideas warranted more capital.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Following the release of Berkshire’s latest Form 13F, five unstoppable stocks account for 65% ($191.3 billion) of the $293 billion investment portfolio Buffett oversees.
Apple: $68.4 billion (23.4% of invested assets)
As has been the case for years, tech goliath Apple (AAPL 0.59%) remains Berkshire Hathaway’s largest holding by a considerable amount. However, Buffett and his team have been net sellers of stocks for eight consecutive quarters, and have sold more than 615 million shares of Apple over the trailing-12-month period, ended Sept. 30.
During Berkshire Hathaway’s annual shareholder meeting in early May, Buffett opined that the corporate income tax rate would probably rise in the years to come. Thus, locking in some of his company’s substantial unrealized gains in Apple now would, in hindsight, be viewed as a smart move by investors.
Then again, with Donald Trump winning the presidency, corporate income tax hikes are now off the table. With Apple stock surging following the reveal of Apple Intelligence, its personal intelligence system for its physical products, including iPhone, Buffett and his team have missed out on huge potential gains.
The one thing Apple does have working in its favor is Wall Street’s market-leading share repurchase program. Since the start of 2013, Apple has bought back $700.6 billion worth of its common stock and lowered its outstanding share count by more than 42%. This has had a notably positive impact on its earnings per share (EPS).
However, with growth in Apple’s physical product sales stalling and the company’s trailing-12-month price-to-earnings ratio hitting 38, an ardent value investor like Buffett may be compelled to continue ringing the register.
American Express: $43.3 billion (14.8% of invested assets)
The second-largest holding in Berkshire’s $293 billion investment portfolio is one of Buffett’s eight “indefinite” holdings, American Express (AXP 2.83%). AmEx, as the company is perhaps better known, has been a continuous holding since 1991.
The financial sector is Buffett’s favorite to invest in for one key reason: financial stocks are cyclical. The Oracle of Omaha and his team are keenly aware that the economic cycle isn’t linear. Although recessions are normal and inevitable, they’re historically short-lived. By comparison, periods of growth typically stick around for multiple years. Disproportionately longer expansions allow financial stocks to thrive.
AmEx’s success is a function of its ability to double dip. It’s the third-largest payment processor in the U.S. by credit card network purchase volume, which allows it to collect predictable fees from merchants. Additionally, it’s also a lender that’s collecting annual fees and interest income from its cardholders.
What’s more, American Express has done a fantastic job of attracting high-earning clientele over the years. Consumers with higher incomes are less likely to alter their spending habits or fail to pay their bills during periods of economic turbulence. Despite being a cyclical company, American Express’s ability to lure affluent clientele should help it navigate recessions better than most lenders.
Image source: Getty Images.
Bank of America: $35.8 billion (12.2% of invested assets)
The No. 3 holding in the portfolio Buffett oversees at Berkshire Hathaway is another financial stock, Bank of America (BAC 1.16%). Based on Form 4 filings with the Securities and Exchange Commission, the Oracle of Omaha has dumped more than 266 million shares of BofA stock since July 17.
Although Buffett didn’t mention Bank of America when offering his opinion on the corporate income tax rate in early May, it’s not a stretch to think that he’s approaching his company’s substantial unrealized gains in BofA in the same manner as Apple.
This aggressive selling activity in Bank of America might also be indicative of the stock market’s historically high valuation multiple. Based on the S&P 500’s Shiller price-to-earnings (P/E) ratio, the stock market has only been pricier than it is now two other times over a span of 153 years. Following other prior instances of extended valuations for the broader market, the S&P 500 has eventually lost 20% or more of its value.
On the bright side, Bank of America is the most interest-sensitive of America’s largest banks by assets. The Federal Reserve’s steepest rate-hiking cycle in four decades, from March 2022 through July 2023, helped add billions of dollars in interest income to BofA’s bottom line each quarter. Even with the nation’s central bank recently kicking off a rate-easing cycle, BofA should continue to enjoy bountiful interest income for the foreseeable future.
Coca-Cola: $24.7 billion (8.4% of invested assets)
Beverage behemoth Coca-Cola (KO 0.25%) is Warren Buffett’s fourth-biggest holding by market value and the longest-tenured stock in Berkshire’s investment portfolio (since 1988). Berkshire’s cost basis in Coca-Cola is so low that Buffett’s company is netting an annual dividend yield, relative to cost, of 60%!
One of the reasons Coca-Cola has been such a phenomenal set-it-and-forget-it type of investment is because it’s a consumer staples stock. In other words, it provides a good (beverages) that consumers are going to purchase no matter how well or poorly the U.S. or global economy are performing. This provides a level of cash-flow consistency that few businesses can offer.
Adding to this consistency is Coca-Cola’s virtually unmatched geographic diversity. With the exception of North Korea, Cuba, and Russia (the latter of which has to do with its invasion of Ukraine in February 2022), Coca-Cola has operations in every country. It’s taking advantage of strong cash flow opportunities in developed markets, while also moving the organic growth needle in emerging markets.
Branding is critical to Coca-Cola’s success, too. Its marketing team has leaned on digital media channels and artificial intelligence (AI) as a means to reach younger consumers. According to Kantar’s annual “Brand Footprint” report, Coca-Cola’s products have been chosen from retail shelves more than any other brand for 12 consecutive years.
Chevron: $19.1 billion (6.5% of invested assets)
The fifth Buffett stock that, along with Apple, American Express, Bank of America, and Coca-Cola, collectively makes up 65% of Berkshire Hathaway’s $293 billion investment portfolio is energy juggernaut Chevron (CVX 0.45%).
Energy stocks haven’t historically played a big role in Berkshire’s portfolio. Thus, the Oracle of Omaha having north of $19 billion invested in Chevron indicates he’s quite optimistic about the spot price of crude oil heading higher.
In addition to Russia’s invasion of Ukraine and the question marks this creates regarding Europe’s long-term energy supply demands, three years of capital underinvestment during the COVID-19 pandemic by global energy majors (including Chevron) has hampered production. When the supply of an in-demand commodity like oil can’t be quickly increased, it tends to provide an upward lift on the spot price of that commodity.
Though Chevron generates its best margins from its drilling segment, it’s important not to overlook that it’s an integrated energy company. It owns transmission pipelines, as well as downstream refineries and chemical plants. These ancillary operations help Chevron hedge against moves lower in the spot price of crude oil.