Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett isn't infallible, but he does have a knack for running circles around Wall Street. Since taking the reins, the 3,787,464% aggregate return for Berkshire's Class A shares (BRK.A) is more than 153 times greater than the 24,708% total return, including dividends paid, for the benchmark S&P 500.
The Oracle of Omaha's overwhelming success is attributed to his patience as an investor, his willingness to buy cyclical companies and dividend stocks, and his rather narrow research focus, which makes him an expert in a handful of sectors and industries. But it's Berkshire Hathaway's portfolio concentration that has, arguably, played the biggest role in this outperformance.
As of the closing bell on March 17, 2023, a whopping 86% of Warren Buffett's $322 billion investment portfolio was invested in only eight stocks.
1. Apple: $141.9 billion (44.1% of invested assets)
Nothing says portfolio concentration quite like having nearly $142 billion of your $322 billion of invested assets tied up in a single stock. But that's precisely the case with tech stockApple(NASDAQ: AAPL), which is viewed by Buffett as one of Berkshire Hathaway's "four giants."
According to Interbrand, Apple has been the most valuable brand for 10 straight years (through 2022). The company's products and brand are well-known, which tends to keep customers loyal as well as draw in new businesses and consumers. With CEO Tim Cook overseeing his company's shift to a services-oriented focus, Apple should have no trouble continuing to generate jaw-dropping cash flow in virtually any economic environment.
It's also no secret that Buffett loves investing in companies with sizable capital-return programs. Apple is doling out $14.55 billion annually in dividends, and it's repurchased more than $550 billion of its own stock since the beginning of 2013.
2. Bank of America: $28.7 billion (8.9% of invested assets)
There's probably not an industry Warren Buffett is more comfortable or confident investing in than bank stocks. Among banks, none has his attention quite like Bank of America(NYSE: BAC).
The most interesting thing about Bank of America is its sensitivity to interest rate movements. With the Federal Reserve having no choice but to tackle historically high inflation, lending institutions with outstanding variable-rate loans are set to capitalize. Among money-center banks, Bank of America is benefiting most, with $3.3 billion more in net-interest income during the fourth quarter compared to the prior-year period.
But chances are that Buffett and his investment team aren't too honed-in on BofA's interest sensitivity. Rather, they're just allowing time to be their ally. Since economic expansions last significantly longer than recessions, banks benefit in lockstep with a growing U.S. economy over the long term.
3. Chevron: $25.5 billion (7.9% of invested assets)
Energy stocks have grown to become the third-largest sector by weighting in Berkshire Hathaway's portfolio. A big reason for that is the greater than $25 billion stake in Chevron(NYSE: CVX).
Having such a sizable position in Chevron is likely a reflection of Buffett and his investing lieutenants, Todd Combs and Ted Weschler, expecting oil prices to remain above their historical norm. While Russia's invasion of Ukraine is a clear monkey wrench in the global energy supply chain, arguably more damage has been done by three years of underinvestment tied to the COVID-19 pandemic. Without a way to quickly ramp up supply, spot oil prices may offer a healthy floor.
Like most big oil companies, Chevron is also quite shareholder friendly. It's raised its base annual dividend for an impressive 36 consecutive years, and the company's board recently authorized a share repurchase program of up to $75 billion.
4. Coca-Cola: $24 billion (7.5% of invested assets)
Beverage stockCoca-Cola(NYSE: KO) is Berkshire Hathaway's longest-held position (since 1988). With a cost basis to Buffett's company of only $3.2475 for each share of Coke, the company's $1.84 base annual payout works out to a hearty 56.7% yield on cost! Coca-Cola has raised its base dividend in each of the past 61 years.
What Coca-Cola brings to the table for the Oracle of Omaha and his team is almost unparalleled consistency. Because it operates in all but three countries worldwide (North Korea, Cuba, and Russia), it's able to bring in predictable operating cash flow in developed markets while continuing to penetrate emerging/developed countries to grow its cold-beverage market share.
Coca-Cola can also be described as a wholesome family brand -- and Buffett certainly loves investing in brands that consumers trust and value. Coke's marketing team has consistently been on-point with its social media campaigns and in using its holiday tie-ins to connect with mature audiences.
5. American Express: $23.7 billion (7.4% of invested assets)
Next to Coca-Cola, payment processor American Express(NYSE: AXP) is Buffett's longest-held stock (since 1993). Following a recent dividend increase, Berkshire Hathaway's yield on cost for AmEx is now north of 28%!
One of the reasons American Express is such an enticing investment is its ability to play both sides of the aisle. In addition to being the No. 3 payment processor by credit card network purchase volume in the U.S., AmEx is a lender. This allows it to generate annual fees and interest income on top of payment-processing fees.
What's more, American Express has a storied history of successfully attracting high-income clientele. High earners are often less susceptible to inflationary and economic pressures. In other words, their buying habits don't change much, and they're more likely than the average consumer to pay their bills on time.
6. Kraft Heinz: $12.3 billion (3.8% of invested assets)
Consumer staples stockKraft Heinz(NASDAQ: KHC) is Berkshire Hathaway's sixth-largest holding and accounts for close to 4% of invested assets. It may also be one of the Oracle of Omaha's worst investments.
On the one hand, Kraft Heinz was one of the companies that reaped the rewards of shifting consumer habits during the pandemic. With people staying home more often, the company's easy-to-prepare meals, snacks, and condiments flew off grocery store shelves. It's worth pointing out that Kraft Heinz's portfolio of brand-name foods has helped it easily outpace inflation.
On the other hand, volume has begun declining, with price hikes doing the entirety of the heavy lifting for Kraft Heinz. Also, the company's balance sheet is weighed down by mountains of long-term debt and goodwill. Sustaining the momentum Kraft Heinz regained during the pandemic could prove difficult, if not impossible, with its inflexible balance sheet.
7. Occidental Petroleum: $12.2 billion (3.8% of invested assets)
If Chevron is Warren Buffett's "Batman" of the energy sector, oil stockOccidental Petroleum(NYSE: OXY) is his "Robin." Since the beginning of 2022, Buffett and his lieutenants have purchased more than 208 million shares of Occidental Petroleum stock.
While the thesis behind Berkshire's Occidental Petroleum buys is similar to Chevron -- i.e., a higher sustained crude oil spot price -- Occidental offers even more upstream exposure, as a percentage of total revenue, than Chevron. If the price of oil does remain above its historical average, Occidental's cash flow will certainly reflect that.
However, Occidental, like Chevron, is also an integrated operator. The company's downstream chemical operations benefit if the price of crude oil drops. Lower input costs, and the typical demand increase associated with lower oil prices, provide some degree of hedge for Occidental Petroleum and should shore up its cash flow.
8. Moody's: $7.3 billion (2.3% of invested assets)
The eighth stock that collectively accounts for approximately 86% of the $322 billion investment portfolio Warren Buffett oversees at Berkshire Hathaway is credit-ratings agency Moody's(NYSE: MCO). Moody's has been a continuous holding for more than two decades.
Since the financial crisis, Moody's credit-rating segment has been its cash cow. When lending rates were at or near historic lows, businesses and various government entities were busy borrowing cheap capital. But with the U.S. inflation rate soaring and interest rates rising at their fastest clip in decades, it wouldn't be a surprise to see credit-rating demand slow.
Thankfully, Moody's Analytics segment can pick up the slack. As its name implies, this division is focused on providing analytics software and tools to help businesses and agencies manage risk and remain in compliance with local, state, national, and global laws. Increasing macro uncertainty is the perfect environment for Moody's Analytics to thrive.
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American Express and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Moody's. The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.