Warren Buffett has a clear investing mantra: He likes value, and he likes holding on for the long term. The tactic has worked out well. Since Buffett took the reins of Berkshire Hathaway (BRK/B) in 1964, through the end of 2018, his stock has delivered an annual return of 20.5% that more than doubled the Standard & Poor’s 500-stock index (.SPX).
Indeed, as the Oracle of Omaha famously told investors, his favorite investing period is “forever.” This message reappeared in the hedge fund guru’s most recent annual letter. In describing the fund’s current portfolio of stocks, Buffett wrote, “In all likelihood, we will hold most of these stocks for a long time.”
The 88-year old continued, “My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.”
That said, times change, and so do investing theses. Buffett has exited positions before, and will continue doing so when it makes sense – sometimes very quickly. For instance, Berkshire recently announced that it had exited its position in Oracle (ORCL) during the fourth quarter – a position it had initiated just one quarter earlier! That’s an exception to the norm, but the point is some Buffett stocks are destined to be around longer than others.
With this in mind, we delved into Berkshire’s portfolio and found five Warren Buffett stocks that seem likely to stick around for the long term.
iPhone maker Apple is the greatest of all Buffett stocks by value – at roughly $47 billion, that’s 23% of Berkshire Hathaway’s equity portfolio. Buffett has been building the stake ever since he first initiated a position in the stock at the beginning of 2016 – that is, until Berkshire trimmed its Apple holding by around 1% last quarter.
Don’t be misled. Although this was initially interpreted as a bearish signal, it quickly became apparent that Buffett was not the decision-maker here. Buffett’s assistant, Debbie Bosanek, subsequently told Reuters, “One of the managers other than Warren had a position in Apple and sold part of it in order to make an unrelated purchase.” She also clarified that “none of the shares under Warren’s direction have ever been sold.”
Instead, it looks like Buffett is sticking fast to his bullish thesis on AAPL. The hedge fund manager recently told CNBC, “If it were cheaper, we’d be buying it. We aren’t buying it here … I don’t see myself selling – the lower it goes, the better I like it, obviously.”
Even iPhone sales trends aren’t an immediate worry. Buffett said back in August, “I do not focus on the sales in the next quarter or the next year. I focus on the – they won’t tell you exactly how many – but hundreds and hundreds and hundreds of millions of people who practically live their lives by it. And if you look at that little piece of whatever it is, it’s some the most valuable real estate in the world.”
This highly loyal user base is one of the reasons behind Bank of America’s recent upgrade to AAPL shares. BofA’s Wamsi Mohan upgraded AAPL from “Hold” to “Buy” on March 11 and ramped up his 12-month price target from $180 to $210 (13% upside potential). The analyst thinks Wall Street has become too bearish on the stock and sees an attractive opportunity at current levels.
Bank of America
Bank of America is the fund’s biggest finance holding by a long shot. Following a 2% increase in Q4, Berkshire now owns $22 billion worth of BAC shares – a position it has held for two years. However, its dealings with BofA go back much further, to 2011 when Buffett invested $5 billion in Bank of America preferred shares. He then sold $5 billion in BofA preferred stock to exercise warrants to purchase 700 million common shares in 2017.
Five-star Oppenheimer analyst Chris Kotowski wrote in a January industry report: “One of the reasons that we are so incessantly bullish on bank stocks is that investors still so incessantly hate them. The (KBW Nasdaq Bank Index (.BKX)) dropped some 21% from its November highs to the peak of the Christmas sale on December 24th. While the group has recovered most of the drop, the stocks still remain resoundingly cheap at a 63% relative P/E multiple.”
Kotowski says bank balance sheets are arguably the best they have ever been, and the business models are decidedly less capital-intensive. The conclusion: Investor distrust in banks is good news for investors like Buffett. It means low expectations are incorporated in stocks’ valuations. Plus, it makes management teams more risk-averse because they know investors won’t take kindly to any blow-ups.
“Whether we are “late cycle” or not, we remain confident that banks have de-risked their balance sheets so significantly that the group will perform far better than investors expect,” concludes Kotowski, who has a “Buy” rating and a $34 price target on BAC. The analyst also points out that shares trade at a 30% discount to the average regional bank, and that the discount will shrink over time as the 2007-08 financial crisis fades from memory.
Warren Buffett is famous for the success of his American Express investment. Indeed, a few people have even argued that if it weren’t for American Express, Buffett wouldn’t be held in quite the same regard as he is today.
The investing guru made a highly controversial move to snap up AXP stock back in the 1960s, when American Express was embroiled in the famous “Soybean Scandal.” (American Express had guaranteed millions of dollars’ worth of soybean oil that turned out to be seawater.) While other investors fled the stock, Buffett bought up 5% of the company with 40% of Buffett Partnership’s available capital. This was his first fund, founded before he took a controlling interest in Berkshire Hathaway in 1965.
Fast forward to today, and we can see that Berkshire’s holding of American Express has remained unchanged over the past eight years. Right now that stands at about 151,000 shares worth $17.2 billion. However, while Berkshire hasn’t committed more money to AXP, its stake percentage has grown because AmEx’s management keeps buying back stock.
Buffett refers to this in his 2018 annual shareholder letter. He tells investors how much Berkshire values stocks that buyback shares: “All of our major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares. We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”
The hedge fund guru continues by drawing attention to American Express specifically: “Our ownership (in AXP) increased from 12.6% to 17.9% because of repurchases made by the company. Last year, Berkshire’s portion of the $6.9 billion earned by American Express was $1.2 billion, about 96% of the $1.3 billion we paid for our stake in the company. When earnings increase and shares outstanding decrease, owners – over time – usually do well.”
The Berkshire portfolio has its fair share of consumer stocks, and one of its most prominent holdings is warehouse retailer Costco Wholesale. After initiating a position in 2001, Buffett has built up a substantial holding currently worth around $1 billion. This position was left unchanged in the most recent quarter.
According to Buffett, the jewel in the crown for Costco is its famous private-label brand Kirkland Signature. Last year, “Kirkland Signature” raked in more revenues than Macy’s (M) and JCPenney (JCP) combined. It also represents about a third of all Costco revenues and has demonstrated significant growth, including from $35 billion in 2017 to $39 billion last year.
It’s no wonder consumers like Kirkland – their products sell for about 20% cheaper than similar branded products while still maintaining high quality. And the knock-on effect is that other companies are forced to cut their own prices to stay competitive. “Here (Kraft Heinz) are, 100 years plus, tons of advertising, built into people’s habits and everything else,” Buffett told CNBC in a recent interview. “And now Kirkland, a private label brand, comes along and with only 750 or so outlets does 50% more business than all the Kraft-Heinz brands.”
A fundamental part of the picture also comes from Buffett’s right-hand man and Berkshire’s vice-chair, 95-year-old Charlie Munger. Although Munger prefers not to sit on boards outside of Berkshire, he has been a director at Costco for more than 20 years now, and he’s not shy about is love of the stock. In 2011, when asked about his favorite company (not including Berkshire Hathaway), he replied: “That’s easy. It’s Costco. Costco is a different kind of place. It’s one of the most admirable capitalistic institutions in the world.”
The billionaire continued: “It has a frantic desire to serve customers a little better every year. When other companies find ways to save money, they turn it into profit.” And eight years later, it seems like this strategy is still paying off. Shares have delivered a total return (price appreciation plus dividends) of 65% over the past three years. Oppenheimer’s Rupesh Parikh even singles out COST as “a top pick for us” and lifted his price target on the stock from $240 to $245 (5% upside) earlier in March.
Automaker General Motors has been a stalwart of the Berkshire portfolio since 2012. Most recently, in Q4, Buffett demonstrated a notably bullish sentiment toward the stock when it added 19.8 million shares. This 37% increase brings its total position to about $2.7 billion in worth.
The latest investment suggests Buffett sees GM stock as undervalued. Even though GM has made incredible progress since it filed for bankruptcy back in 2009, investors still appear wary of the auto giant. However the company is now a much more streamlined, cost-effective company than it was 10 years ago, with a very strong management team headed by CEO Mary Barra.
RBC Capital’s Joseph Spak, who has a “Buy” rating on GM with a $52 price target (37% upside potential), says GM’s transformation is “underappreciated.” “Recent restructuring actions that should lead to ~$4.5bn savings run-rate in 2020 … significantly improves GM’s positioning. Simply put, all else equal we estimate it’s worth ~$2.50 in EPS,” he writes.
GM also sports a self-driving unit, Cruise, which could be a money-maker for the company. Japan’s SoftBank (SFTBY) and Honda (HMC) have invested about $5 billion in Cruise, which recently announced plans to double in size. This ramp up in the workforce to more than 2,000 employees is part of GM’s goal of launching its robo-taxi service before the end of the year.
“It remains to be seen whether GM can win on the robo-taxi opportunity, but it has a seat at the table … and it’s early enough in the story that we still see a lot of potential for that narrative to take hold and for growth/tech investors to look to GM, increasing demand for the shares and potentially the multiple,” Spak writes.
The stock, meanwhile, trades at just 6 times future earnings estimates and offers a 4% yield that’s roughly double what the S&P 500 pays.