Warren Buffett bet the farm on these three stocks

Berkshire Hathaway (BRK.A -1.39%)(BRK.B -1.62%) CEO Warren Buffett is arguably the greatest investor of our generation. Since taking over as CEO in 1965, the Oracle of Omaha, as it is now known, has created more than $740 billion in value for shareholders (including himself), and has provided a total return on Class A stock (BRK.A) of 4 ,100,820%, as of April 25, 2022.

There is no shortage of reasons for Buffett’s success over the years. For example, Buffett has an affinity for cyclical companies and dividend stocks, and has been willing to buy and hold quality business for decades to let his investment thesis shine.

However, Berkshire Hathaway’s success also has to do with Buffett’s lack of diversification. Although his company owns stakes in nearly forty securities, Buffett bet the farm on the next three stocks.

Berkshire Hathaway CEO Warren Buffett. Image source: Motley Fool.

apple

When it comes to betting the farm on a high performing company, ie tech stocks apple (AAPL -1.91%) Checking all the right boxes for Warren Buffett and his investment team.

Apple accounts for more than 30% of the $104.6 billion cost basis for Berkshire’s investment portfolio, and totaled nearly 44% of Berkshire’s $339 billion in invested assets, as of April 25. billion gain from its stake in Apple. It’s also worth noting that Apple generates approximately $799 million in dividend income for Berkshire Hathaway each year.

In the eyes of Warren Buffett, there is little to not like about Apple. The company has a very loyal customer base, is one of the most recognizable brands in the world, and is the leader in the smartphone market share in the United States. In fact, the launch of 5G-enabled iPhones sent Apple’s sales and profits to record levels.

In addition to his success with tech products, Apple CEO Tim Cook is overseeing the promotion of subscription services. The subscription-based model should mitigate the revenue clump associated with product replacement cycles, and has a good chance of raising Apple’s operating margins over time.

Moreover, Apple has spared no expense through its generous capital return program. For some context, Apple only returned $100 billion to shareholders in fiscal 2021 (the company’s fiscal year ends in September). It repurchased $86 billion of common stock, returning more than $14 billion to its investors in dividends. The Oracle of Omaha is a big fan of the business that rewards patient investors.

Business people shake hands.

Image source: Getty Images.

American bank

Warren Buffett bet a second stock on the proverbial ranch as a money center giant American bank (buck -1.43%).

According to Buffett’s 2021 letter to shareholders, Berkshire Hathaway has spent more than $10 billion on just two securities: the aforementioned Apple, at a cost of $31.1 billion, and Bank of America, at a cost of $14.6 billion. As of April 25, Bank of America has acquired 11.4% of the value of the Berkshire portfolio, with Buffett and his investment team reporting unrealized gains of nearly $24 billion.

The Oracle of Omaha is a big fan of bank stocks, probably because they are a very cyclical business. Buffett is well aware that recessions are a perfectly normal and inevitable part of the economic cycle. But he also knows that downturns only last for a few months to two quarters. By comparison, the vast majority of economic expansions last for years. Buying shares of banks like Bank of America is Buffett’s way of playing the numbers game that highly favors impatient investors.

Another reason for optimism about Bank of America’s future is its sensitivity to interest rates. As the Federal Reserve looks to rein in historically high inflation by raising interest rates, the Bank of America is set to be a big benefactor. According to the company, a parallel 100 basis point shift in the interest rate yield curve is estimated to generate $5.4 billion in net interest income over 12 months.

Bank of America’s digitization efforts are also paying off. Sales completed online or via mobile apps were 53% last quarter, up from just 30% in the same quarter three years ago. Greater digital adoption allows BofA to consolidate some of its subsidiaries and improve its operational efficiency.

Someone writes and spins the word buy under a drop in a stock chart.

Image source: Getty Images.

Berkshire Hathaway

Buffett III bet that the farm would not appear in the company’s quarterly 13F filings with the Securities and Exchange Commission. That’s because it’s Buffett’s Berkshire Hathaway company.

Prior to July 2018, Buffett and his right-hand man, Charlie Munger, were allowed to buy back Berkshire Hathaway shares only if the price-to-book value dropped to or below 120% (20% or less of the book value premium). But in the six years to July 2018, Berkshire shares held fairly steady within the range between 130% and 160% of book value, resulting in no share repurchases.

But things changed on July 17, 2018. The Berkshire Board of Directors passed new measures that gave Buffett and Munger the ability to buy back shares of their company. As long as Berkshire has at least $20 billion in cash, cash equivalents and US Treasuries, and the duo believe their company’s shares are trading at less than intrinsic value, buybacks can begin without any ceiling. Since mid-2018, Buffett has overseen the buyback of $58 billion of Berkshire’s Class A and B stock.

Why buy back so many shares? The basic answer is that it tends to have a positive effect on every remaining serving. Because there are fewer shares left, companies that grow their income over time can expect to increase earnings per share from share buybacks. This could make Berkshire Hathaway more attractive from a fundamental standpoint and increase its share price.

With Berkshire’s Class A stock average annual return of 20.1% since 1965, share buybacks seem like a smart bet for the Oracle of Omaha and its shareholders.

Leave a Comment