Warren Buffett and his company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) have for years done an excellent job of creating shareholder value, particularly through the company’s $314 billion-plus equities portfolio. One of Buffett’s tips for the investing community is to go in big when you see a good opportunity.
Buffett is actually not a big fan of diversification, having famously said that it is a “protection against ignorance” and “makes little sense if you know what you’re doing.” This theme is quite evident in Berkshire’s portfolio, which is heavily concentrated among just a handful of names. Even right now with all of the market volatility, nearly 65% of Buffett and Berkshire’s portfolio is composed of these four stocks.
For those that follow Buffett, it should come as no surprise to hear that the consumer tech giant Apple (NASDAQ: AAPL) is the largest position in Berkshire’s portfolio, making up more than a third. Berkshire began buying Apple in 2016 and now owns more than 911 million shares valued at more than $121.7 billion.
One reason Buffett loves Apple is because of the company’s durable cash-generating business. In the company’s most recent quarter, Apple had more than $28 billion of operating cash flow and a profit of more than $25 billion. For the fiscal year 2021, Apple generated more than $104 billion of operating cash flow. This has enabled Apple to buy back a lot of stock, which we know Buffett loves. Apple has now repurchased more than $467 billion of its stock over the past decade.
Apple has also created one of the world’s most enviable brands with products like the iPhone, and there are more than 1.8 billion active Apple devices. This kind of brand power is particularly helpful in times of inflation because consumers are so loyal that Apple can pass on rising costs to consumers. All of these reasons help explain why Apple stock has appreciated almost 280% over the last five years.
Bank of America: 10.4%
Buffett knows the banking sector incredibly well and has long been an investor in large bank stocks. Interestingly, as Buffett and Berkshire were selling other large bank stocks like JPMorgan Chase, Goldman Sachs, and Wells Fargo during the early months of the pandemic, it was buying Bank of America (NYSE: BAC). Berkshire plowed more than $2 billion into the stock in 12 consecutive trading days in August 2020. Berkshire now owns just under 12% of shares outstanding and could be allowed to purchase up to nearly 25% of the stock, according to the Federal Reserve.
Bank of America is a huge beneficiary of rising interest rates and will see net interest income, the profits banks make on loans, securities, and cash after funding those assets, soar as the Fed continues to hike rates. Bank of America has also greatly improved its deposit base, which is now composed of even more sticky, low-cost retail deposits that will reprice slower as rates go up.
The bank has also successfully built out its investment banking and trading operations, which are now among the dominant players in the industry. Although underwriting activity for events like initial public offerings is way down, all of this market volatility will help Bank of America’s trading businesses. Bank of America is also planning to keep expenses unchanged this year, which would be a great accomplishment amid rising inflation.
Buffett and Berkshire have had a bit of a mixed relationship with Chevron (NYSE: CVX). Berkshire first bought the stock in 2020, then sold some of it in 2021, and then bought significantly more toward the end of 2021 and in the first quarter of this year. Overall, Berkshire now owns roughly 159.2 million shares of Chevron valued at more than $26.1 billion, making it a top position.
Clearly, Buffett got much more interested in U.S. oil stocks as Russia’s invasion of Ukraine played out and as the cost of oil exploded to more than $120 per barrel at times. Chevron recently traded at all-time highs but has since sold off a bit. Earlier this year, the company raised its free cash flow projections and share- repurchase plans.
There is certainly debate about which direction oil prices could head in the near and long term, but Chevron has said it can cover its capital return aspirations with the price of oil below $50 per barrel. The company has paid a dividend for 35 straight years and currently has an attractive annual dividend yield of roughly 3.4%.
American Express: 7%
The credit card and payments company American Express (NYSE: AXP) is another one of those brands that Buffett absolutely loves and has admired over the years because of the intense customer loyalty it commands. Buffett has owned American Express since the 1960s.
Last July, AmEx raised the annual subscription fee for its platinum card from $550 to $695. Since then, the company has still seen strong card growth, adding a record 3 million new card accounts in the first quarter of 2022, 68% of which were new fee-based cards such as the platinum card.
Credit card companies can do well with rising interest rates because they can charge higher interest on purchase balances. However, credit card companies can also struggle with high inflation if it slows consumer spending or if inflation tips the economy into a recession and loan losses rise. Still, American Express has one of the best brands in the industry, and Buffett and Berkshire have ridden out many recessions holding the stock.
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. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.