If you’re looking for the best stocks to buy and hold forever, borrowing a few shares from Warren Buffett is never a bad idea. After all, he is not called the Oracle of Omaha for nothing. There’s a reason for him Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) has been able to surpass S&P500(SNPINDEX: ^GSPC) over the years.
Here’s a look at three of your best Warren Buffett bets of the moment, while they’re arguably undervalued.
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The Coca-Cola Company(NYSE:KO) is the world’s largest beverage name, including brands like Gold Peak tea, Minute Maid juices, Dasani water and a host of others in addition to the cola of the same name.
The company currently does about $46 billion in business each year, but regularly raises the top and bottom line. The same goes for the dividend, which has been increased every year for the past 62 years. This reliable income is a big reason why Buffett has stuck with this cash cow since he first got into it in 1988.
And don’t expect this series to end anytime soon, or even ever. Unlike rival PepsiCoCoca-Cola does not bottle most of its products. The majority of revenue comes from selling branded concentrate to franchise bottlers, who in turn handle the production and distribution that puts the products on store shelves.
While this arrangement means less revenue relative to the amount of beverages consumers drink, it is a higher-margin model as the bottlers assume most of the cost-based risk. Higher profit margins, in turn, mean more earnings per share, which supports continued dividend payments.
By the way, Berkshire Hathaway’s 400 million shares in Coca-Cola are worth almost $26 billion – the conglomerate’s fourth-largest holding. That in itself is a hint worth taking.
So, what is Berkshire Hathaway’s largest holding? Buffett – or at least one of his lieutenants – has divested his stake in the American economy Apple(NASDAQ: AAPL) for some time now. However, with the remaining 300 million shares (worth $69 billion), Apple remains Bearkshire’s most important investment. Again, take the hint.
When Berkshire started buying Apple in 2016, people were a bit taken aback. Buffett is generally not a fan of technology stocks, explaining that it is difficult to figure out what they are worth simply because their technologies can be difficult to understand; they may or may not keep competitors at bay.
However, as time went on, purchasing Apple made more and more sense. The customers are very loyal and the company continuously produces competitive products. The launch of its services (apps, digital content and the like) is also now generating the kind of recurring revenue that Buffett has often sought, accounting for about a quarter of Apple’s current revenue.
Berkshire has lost half its stake in the consumer tech giant this year alone, but don’t read too much into that. Buffett isn’t afraid to buy a company he believes in, but even by his standards, Apple was becoming a dangerously large holding with about half the value of all his holdings in publicly traded investments.
He may also be wary of such a profitable choice if tax rates on capital gains are about to rise.
However, the average newcomer like you wouldn’t have to deal with these concerns. The same reasons he liked it then still apply to newcomers today: the leadership in the smartphone market and the service revenue growth that the iPhone is increasingly driving. Last year’s services business improved a further 12%, continuing an established growth trend.
Finally, you should know that Buffett himself doesn’t necessarily personally own Apple, Coca-Cola, or any of the other tickers within Berkshire Hathaway’s portfolio, even though this is rarely pointed out when discussing Warren Buffett’s stock picks.
It takes some of the excitement out of poaching some of the Oracle of Omaha’s picks for yourself. But investing should be about results first and foremost, and Berkshire Hathaway certainly delivers. While this doesn’t happen every year, given enough time, Berkshire itself easily outperforms the broader market.
This is at least partly a result of Buffett’s (and his management team’s) patience with Berkshire stock, something that many investors struggle with. But that’s also because most of its value isn’t in the publicly traded stocks it owns, but rather in the private entities it owns.
These include cash drivers such as flooring company Shaw, Duracell Batteries, Pilot Travel Centers, Clayton Homes and Geico Auto Insurance, to name a few. These are great companies that you simply can’t help but keep.
Keep in mind that while Berkshire collects a lot of recurring cash from its investments, it doesn’t distribute that money in the form of dividends, which it doesn’t pay out. Rather, it’s accumulating this money while waiting for the next big buying opportunity – something else that Warren Buffett has shown incredible patience for.
So don’t let Berkshire’s current record-breaking cash pile of $325 billion keep you from buying. When the right opportunity presents itself, Buffett will start buying before announcing it.
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James Brumley has positions in Coca-Cola. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
3 Warren Buffett Stocks to Hold Forever was originally published by The Motley Fool
