Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has inspired a generation of investors to follow in his footsteps. His investment record delivered a 20% annualized return to Berkshire shareholders over the last 57 years. Buffett did it through patiently holding shares of great companies through thick and thin, which is a good reminder in these challenging market conditions.
Berkshire's portfolio is full of investment ideas. Here's why three Motley Fool contributors selected Kraft Heinz(NASDAQ: KHC), Amazon(NASDAQ: AMZN), and Apple(NASDAQ: AAPL) as three great picks right now.
Invest in pricing power to beat inflation
John Ballard (Kraft Heinz): One of Berkshire Hathaway's largest holdings is Kraft Heinz. The stock has underperformed over the last five years, but true to form, Buffett has demonstrated extreme patience, and the reluctance to sell might be finally paying off.
After plunging in value leading up to the pandemic, the stock has slightly outperformed the broader stock market over the last year. Kraft Heinz's sales performance has started to show resiliency amid the economic headwinds hitting consumers. In the second quarter, adjusted sales grew 10% year over year, driven by price increases.
No one likes price increases, but for investors, it's a good quality to identify in a business. A business that can raise prices, as Kraft Heinz just did, and still post revenue growth is a sign of a strong brand that can generate satisfactory returns for shareholders.
Warren Buffett loves investing in companies with strong brands. It's the reason for Berkshire's investments in Apple and Coca-Cola, and it's the reason Buffett continues to hold shares of Kraft Heinz, which owns many grocery store staples like Philadelphia, Jell-O, Velveeta, and the famous ketchup brand.
Investors can buy Kraft Heinz stock at a modest valuation of 13.9 times expected earnings this year. Kraft Heinz also pays a high dividend yield of 4.31%. Investors could do a lot worse in a tough economy than owning shares of a company that sells products people buy every day, while paying out a steady stream of dividend payments.
Holding on through tough times
Jennifer Saibil (Amazon): Warren Buffett's investment in Amazon stock is fairly recent. Berkshire Hathaway began nibbling at the stock in 2019, which means it didn't benefit from the colossal stock gains that Amazon gave shareholders for two decades. It did, however, reap the rewards of ownership over the past three years as the company handled the enormous pandemic demand. In those three years, the stock has only gained about 47%, although that low number is partially due to a dramatic price drop along with the market earlier this year.
Buffett isn't likely to be fazed by short-term drops. He's a long-term investor, and his investing philosophy has made him into a living investing legend. And there are many reasons to believe that Amazon's winning streak is far from over.
One of them is Amazon Web Services (AWS). The company's cloud-computing division keeps pumping out revenue, profits, and growth opportunities. It posted another excellent performance in the 2022 second quarter, generating a 33% year-over-year increase in revenue and a 36% increase in operating income. It cemented new deals and upgraded its infrastructure to handle more volume and achieve greater efficiency. Despite pressure in retail, Amazon can count on AWS to post reliably high results.
Beyond AWS, Amazon has been expanding into many new areas, including healthcare. It already offers some telehealth services, and its acquisition of One Medical solidifies its entry into that area. This could be an explosive growth opportunity for Amazon as it searches for new ways to disrupt old practices.
After decelerating to single-digit growth for three straight quarters, Amazon is expecting double digits in the 2022 third quarter, which includes Prime Day. Amazon stock has made a bit of a recent comeback along with a rising market, so even though it's down 20% in 2022, it's up 22% over the past month, and investors who have been on the fence might want to hop on for the ride.
Apple has built trust with consumers, and it's paying off
Parkev Tatevosian (Apple): Apple is one of Warren Buffett's top holdings and is an excellent stock to buy in August. For decades Apple has proven its ability to create innovative electronic products that people love. That skill has enabled Apple to grow into a massive international business that boasted $366 billion in sales in 2021. And fortunately for potential investors, the stock is not trading expensively right now.
More impressively than Apple's $366 billion in revenue in 2021 was that it grew from $157 billion in 2021. That's a compounded annual growth rate of 12.9%. It's difficult for any company to achieve that expansion rate, let alone one that started at a revenue of $157 billion. It's another notch on its belt for serving customers well enough that they keep coming back for the latest technology.
Apple is not giving away these products. Not in the least. Its operating income rose from $55 billion to $109 billion in the time mentioned above. Customers are willing to pay a premium price for Apple's products partly because it has earned that trust. The electronics that Apple sells (smartphones, smart watches, laptop computers, desktop computers) cost consumers from a few hundred to a few thousand dollars. Customers are more likely to choose a trusted brand when parting with significant sums of money.
There are few people who will argue that Apple is not an excellent business. But it's hard to make a good return on investment if you pay too high a price. However, Apple is not trading expensively. Investors can purchase shares in this high-quality business at a price to earnings of 27 and a price to free cash flow of 25.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. John Ballard has positions in Amazon. Parkev Tatevosian has positions in Apple. The Motley Fool has positions in and recommends Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $47.50 calls on Coca-Cola, 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.