Many investors like to model their portfolios after successful managers like Warren Buffett. Although Buffett has rightly earned his success amid the growth of Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%), investors have to remember that some of his stocks make more sense today as holds than buys. However, other stocks Buffet owns remain great investments today, in particular Apple (AAPL 0.52%) and Bank of America (BAC -1.07%).
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Apple
Apple is by far the largest holding in Buffett's portfolio. The fact that his close friend Bill Gates co-founded Apple's archrival Microsoft has not stopped him from holding approximately 887 million shares, just under 6% of all shares outstanding. Apple's growth to a market cap of almost $2.5 trillion, now the world's largest, has taken the value of Buffett's position to approximately $132 billion.
Despite this massive size, Buffett did not actually open any positions in Apple until 2016. Moreover, despite selling part of his position in Q4 2020, he admitted a few months later at his 2021 annual shareholder meeting that this move was "probably a mistake." Hence, even he at times has underestimated this stock's potential.
Apple's growth prospects remain despite its mammoth size. The iPhone has earned a new lease on life recently amid a 5G upgrade cycle and is arguably the biggest reason to buy Apple stock right now. The company has also benefited from a burgeoning wearables market, existing products such as the Mac and the iPad, and its emerging services businesses.
This has dramatically boosted overall revenue. For the first nine months of fiscal 2021, revenue of $282.5 billion grew 35% from the same period in fiscal 2020. Because Apple limited the growth in operating expenses to 13%, net income rose 66% to $74.1 billion.
Although the company forecasted "strong double-digit year-over-year revenue growth" for its final quarter of 2021, it expects not to match the performance of the more recent quarter. Apple cited unfavorable foreign exchange, supply chain constraints, and a return of services to a more normalized level as reasons for slowing revenue growth.
Still, the stock has risen by 28% over the last 12 months. Moreover, its P/E ratio of about 29 has not only fallen over the previous year, but it also lags Microsoft's P/E of 37 and Alphabet's P/E of 31. Given the growth prospects for Apple's products and a relatively reasonable valuation, Apple should continue to benefit both Buffett and those who follow his investment advice.
Bank of America
Bank of America may come as a surprise given Buffett's history with other bank stocks. At over 1 billion shares, about 12% of the outstanding shares, Buffett's position in Bank of America exceeds his stake in American Express, one of his longest-held investments. It has also taken the place of his one-time favorite stock, Wells Fargo, a holding Buffett has reduced to less than 700,000 shares after owning more than 458 million shares as recently as 2018.
Buffett first took an interest in Bank of America after investing $5 billion in preferred stock that paid a 6% dividend. He also held warrants that allowed him to buy the stock at a low price. He converted his preferred stock to common stock in 2017, and bought more shares in later years.
While average investors will not get such a deal, they can profit from Bank of America's leadership in digital banking. It also holds diverse revenue streams from consumer banking, global banking, and global wealth and investment management.
However, the return to normal business conditions has temporarily affected the top line. For the first six months of 2021, total revenue of $44.5 billion dropped 2% from the same period in 2020, as government programs used to help consumers and businesses survive the pandemic dampened demand for loans.
Nonetheless, net income climbed 131% during that period to $17.3 billion. A dramatic improvement in the provision for credit losses and a tax adjustment related to the revaluation of net deferred assets in the U.K. helped boost income, though higher noninterest expenses modestly offset that benefit.
Still, while the lingering effects of COVID-19 may disappoint some bulls, the company announced a 17% increase for the dividend in Q3. This took the annual payout to $0.84 per share, a yield of about 2.1%.
Such successes helped the stock rise by nearly 60% over the last year. While its P/E ratio of 13 makes it somewhat more expensive than Citigroup and JPMorgan Chase, the multiple remains consistent with historical norms, and such conditions should keep it a popular Buffett stock for the foreseeable future.
