Warren Buffett took over Berkshire Hathaway in 1965. Since then, the holding company’s shares have risen approximately 4,631,475%, making him perhaps the most highly regarded investor of his time.
Buffett knows better than anyone that the price you pay for a share is a major factor in determining what return it will ultimately deliver. If you want your portfolio to perform like Buffett’s, buying shares of quality companies while their stock prices are low should be a big part of your strategy.
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The benchmark S&P500 (SNPINDEX: ^GSPC) The index is up about 36% over the past twelve months, and it appears that Buffett expects continued gains from at least some of its components. At the end of September, $98.6 billion of the holding company’s portfolio was invested in two S&P 500 stocks that lagged the benchmark index. Apple (NASDAQ: AAPL) And Coca-cola (NYSE: KO).
Both stocks traded well below the expectations of Wall Street analysts who follow them closely. Here’s why they’re expected to outperform, to see if they deserve a place in your portfolio.
Berkshire Hathaway has reduced its stake in Apple, but it is still the largest stake in its stock portfolio. The holding company valued its stake in Apple at $69.9 billion at the end of September, compared to $174.3 billion at the end of 2023.
Apple shares underperformed the S&P 500 index, rising just 25% in the 12 months ended Nov. 8, 2024. Gains are muted as it’s been a long time since the iPhone maker launched a new product that could boost revenue growth . Turnover over the last twelve months has shrunk by 0.8% since the end of 2022.
Apple’s lack of growth is concerning, but not for Morgan Stanley analyst Erik Woodring, who thinks the stock can climb much higher. He recently reiterated a $273 price target, which implies upside of about 20% from recent prices.
Whether it was iPhones, Macs or accessories, sales of every product category were lower in fiscal 2024, which ended September 30, than in 2022. Wall Street isn’t turning its back on stocks because service sales are way too high. upwards. Over the same two-year period, App Store, streaming and cloud revenues grew 23% to $96.2 billion.
Equipment sales can fluctuate due to economic downturns and new product cycles. Revenue from recurring services is often more predictable and almost always more lucrative. A revenue mix that shifted to services improved gross profit margin in fiscal 2024 from 43.3% in 2022 to 46.2%.
Improving profit margins could help Apple continue to increase its dividend payout. The stock offers a small yield of 0.4% at recent prices, but the return you receive on your initial investment could be significant by the time you retire. The company managed to increase its quarterly payouts by 29.9% over the past five years.
Apple’s services segment seems to be able to compensate for declining equipment sales, but the market expects a lot of growth in the coming years. The stock has traded at about 32.3 times its free cash flow. It’s probably a good idea to wait on the sidelines for a more attractive entry point.
Apple must design and purchase new semiconductors to prevent product sales from declining. If complicated challenges make you nervous, consider another favorite company of Buffett’s: Coca-Cola. At the end of September, Berkshire’s stake in the soft drink specialist amounted to $28.7 billion.
Buffett is not the only investor who is enamored with Coca-Cola shares. Morgan Stanley analyst Dara Mohsenian recently lowered their price target on the beverage company to $76 per share and reiterated an overweight recommendation. The price target implies an upside of approximately 19% from recent prices.
Overall sales growth generated by Coca-Cola’s signature brands is predictably positive, but that hasn’t helped the stock much lately. On November 8, the stock fell 12% from its all-time high in September.
Wall Street is bullish on Coca-Cola, in part because it is performing exceptionally well for a company that is more than a century old. Sales rose 2% in the first nine months of 2024, and significant gains could be in store. Management expects organic revenue to increase approximately 10% annually through 2024.
Coca-Cola’s share price has been more volatile than usual, but its dividend program is as reliable as it gets. In February, the company increased its quarterly payments for the 62nd year in a row. At recent prices, it offers a 3% dividend yield and a reasonable valuation of 22.4 times forward-looking earnings estimates.
With a relatively simple business that grows reliably, investors can reasonably expect continued profits during retirement. Adding a few shares of Coca-Cola to a diverse portfolio now seems like a great idea for most investors.
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Cory Renauer has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Apple. The Motley Fool has a disclosure policy.
Warren Buffett invested $99 billion of his portfolio in two stocks that could rise 19% and 20%, according to a pair of Wall Street analysts. Originally published by The Motley Fool
