Warren Buffett is one of the smartest investors in the world and has been for decades. As CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)Buffett offers a wealth of investment advice and commentary in his annual letters to shareholders and at the conglomerate’s annual shareholders meeting in Omaha, Nebraska.
Buffett’s advice is generally straightforward, but one area where he can sound contradictory is diversification. He is a staunch supporter of most investors who stick to S&P 500 index funds. He has even instructed the executor of his estate to invest 90% of the money he leaves to his wife after his death in an S&P 500 index fund. Such funds offer a diverse portfolio of stocks representing numerous sectors.
And yet Berkshire Hathaway’s $312 billion investment portfolio is heavily concentrated in just a few stocks. The top three holdings account for nearly 53% of the portfolio’s value. Buffett makes a great analogy here: “If you’ve got LeBron James on your team, don’t take him out of the game to make room for someone else. … It’s crazy to put money into your 20th pick instead of your first pick.”
Here are Buffett’s top three picks right now, which together make up the bulk of Berkshire’s investment portfolio.
1. Apple (29%)
Apple (NASDAQ: AAPL) has long been one of Berkshire Hathaway’s biggest stock investments. Not only did Buffett spend an estimated $37 billion acquiring a stake in Apple from 2016 through 2018, but the stock has also skyrocketed in value since then.
At one point, it accounted for more than 50% of Berkshire’s stock portfolio. Buffett called Apple “a better company than any we own,” referring to Berkshire’s portfolio of wholly owned companies like Geico and See’s Candies. Buffett has recently reduced the position over the past three quarters, including a massive sale of nearly half of Berkshire’s remaining stake in the second quarter. Still, Apple remains by far Berkshire’s largest holding, and Buffett expects it to remain the largest position in his portfolio for the foreseeable future.
There’s a lot to like about Apple. The company’s hardware and services ecosystem is delivering steady revenues, as customers remain fiercely loyal to the brand overall. The services business provides a nice, high-margin area of ​​revenue growth for the company, while the steadfast iPhone keeps cash flow strong. Significant share buybacks provide an additional boost to earnings per share each year. And when a new growth catalyst emerges, such as the potential for iPhone upgrade rates to rise due to the upcoming introduction of new AI features, that delivers a significant boost to earnings.
At its current price, the stock trades for about 30 times forward earnings. That’s a premium over the S&P 500, but the stock is likely worth it, given the cash on its balance sheet and robust share buybacks that are supporting strong shareholder returns.
2. American Express (12%)
Buffett acquired a substantial stake in Berkshire through American Express (NYSE: AXP) in the mid-90s, and he hasn’t done much with the position since. It’s a real buy-and-hold story.
Buffett noted the value of his investment in Amex in his 2022 letter to shareholders. Annual dividends paid on Berkshire’s original $1.3 billion total investment in the stock rose from $41 million in 1995 to $302 million that year. More importantly, the stock has grown at the same pace as Berkshire Hathaway, and even faster over the past decade and a half. In his 2023 letter to shareholders, he said that Berkshire’s share of Amex’s profits the previous year exceeded the $1.3 billion originally invested two decades ago.
Of American Express, he said the lesson is clear: “If you find a really great company, stick with it. Patience pays off.” Indeed, Berkshire’s Amex position is now worth about $37.5 billion.
What sets American Express apart from other credit card networks is that it issues the cards and operates the payment network. As a result, it retains more control and captures a larger share of the card transaction economy. That company has done exceptionally well as more transactions move from cash to digital payment methods such as credit cards. Amex is rapidly expanding its network, particularly internationally, where it lags its biggest rivals, which reinforces the company’s network effect.
More recently, Amex has turned to lending as a growth opportunity. Previously, credit cards required balances to be paid in full each month, but now some cards allow users to carry a balance. Net interest income grew 20% year-over-year in the second quarter, accounting for 23% of net sales.
It has also boosted revenue growth by raising card fees while remaining popular with high-value, high-income consumers, giving Amex additional protection against economic slowdowns relative to other card issuers and payment networks.
Shares are currently trading at a record high, but with a forward price/earnings ratio of 19, the stock still represents good value.
3. Bank of America (11.6%)
Another financial stock that tops Buffett’s list of all-stars, Bank of America (NYSE: BAC) was a more recent addition to the portfolio. Berkshire Hathaway first acquired preferred stock in the bank in 2011, putting $5 billion into it — a very public show of confidence in the bank at a time when investor sentiment toward the bank had deteriorated in the wake of the mortgage crisis. Along with the 5% dividend paid by the preferred stock, Buffett received warrants to buy up to 700 million shares of BofA common stock at any time over the next decade for $7.14 each.
In 2017, Buffett exercised those warrants because Bank of America raised its quarterly dividend to $0.12 per share, meaning Berkshire could get more in dividends from the common stock than from the preferred stock. So he sold the preferred stock to cover his purchase of the common stock. Buffett continued to add to the position in the following years.
Recently, however, Berkshire cut back about 12% of its stake in BofA. The reasoning was likely the same as that behind the Apple stock sale. Berkshire is currently benefiting from favorable corporate tax breaks that expire at the end of 2025. It is sitting on huge gains from its BofA common stock, which currently trades around $38.50.
Bank of America struggled in 2022 and 2023, as the Federal Reserve raised benchmark U.S. interest rates to curb rising inflation. It held a relatively large amount of long-term bonds on its balance sheet, which lost value on paper as those rates rose. That led to a decline in BofA’s net interest income, as it had to pay higher rates on customer deposits while collecting lower rates on pre-2022 bonds. But the worst appears to be behind BofA, as rate cuts appear to be on the horizon. Management believes net interest income bottomed out in the second quarter.
Shares currently trade for 1.5 times tangible book value, a fair price to pay even with earnings under pressure from interest rates. While Buffett recently sold some Bank of America shares, Berkshire’s 12% cut shouldn’t be taken as a signal that anything is amiss with the company.
Should You Invest $1,000 in Berkshire Hathaway Now?
Before you buy Berkshire Hathaway stock, consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $792,725!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 22, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett Has Invested 52.6% of Berkshire Hathaway’s $312 Billion Portfolio in 3 Phenomenal Stocks was originally published by The Motley Fool
