Since Warren Buffett took control of Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) in 1965, the holding company has delivered an astounding average annual return of 20% to shareholders. That rate of increase doubles an investor's money every four years, which is nearly twice as fast as an index fund that tracks the broader market averages. It goes without saying that investors could do a lot worse than using Berkshire's stock holdings as a hunting ground for new ideas.
Berkshire's portfolio is a dynamic list of stocks from different industries. While investment managers Ted Weschler and Todd Combs handle a small amount of Berkshire's investments, Buffett is responsible for most of the company's stock holdings, which are worth almost $300 million at the end of the third quarter.
What follows is a discussion of two of Berkshire's largest investments. Either would make a great holding for any seasoned or new investor.
1. Apple: Buffett loves this iconic brand
To say that Buffett admires the business of Apple (AAPL -0.57%) might be an understatement. It's not only Berkshire's largest holding, sitting at a market value of $123 billion at the end of Q3, but it's also one of Buffett's most successful investments in recent years. The stock is up more than 400% since Buffett started buying in late 2016, and since Buffett is still holding the stock, that means he fully expects the business (and stock) to grow in value over time.
While demand for pricey iPhones can soften in a recessionary environment, Apple still generates a high sales volume of millions of iPhones, iPads, and Macs every year which makes the business largely resilient to an economic downturn. Apple's premium position in the marketplace and brand strength translates to enormous amounts of free cash flow every year that fund growing dividends to shareholders.
Buffett favors investing in industry leaders that consistently reward shareholders with capital returns, and Apple certainly fits that criteria. Apple just capped off a strong fiscal year, with revenue up 8%. Over a fifth of its revenue came from high-margin services, such as apps and subscriptions. Apple converted these profitable revenue streams to a whopping $111 billion in free cash flow, out of which it returned over $100 billion to shareholders.
Analysts are expecting iPhone sales to soften in the near term due to the economy, but this is why investors can buy the stock at a cheaper valuation. Apple now trades at a price-to-earnings (P/E) ratio of 25, which is a fair premium over the market average P/E of 21. Apple is definitely worth more than the average business.
The reason to be confident in Apple's future is that people can hardly get going in the morning without checking their iPhones. It's a daily utility that opens up lucrative revenue streams, such as additional device sales and apps through the App Store. It's this relationship that explains Buffett's thinking when he decided to start buying Apple stock in 2016. It's the tight customer relationships that will keep Apple growing its revenue over the long term and paying out more dividends, where it has already increased the payout by 46% in the last five years.
2. TSMC: The leading chip maker in the world
Berkshire Hathaway opened a new position in Taiwan Semiconductor Manufacturing (TSM -4.86%), better known as TSMC, in the last quarter. At the end of Q3, Berkshire held just over 60 million shares worth $4.1 billion. Like Apple, it fits the type of industry leader that would appeal to Buffett.
TSMC is the largest chip foundry in the world. It manufactures high-performance processors for the leading chip designers in the world, including Nvidia and Intel. This is a cyclical business that can see revenue soften during economic downturns, but with the near-term outlook looking very gloomy into 2023, investors have a good opportunity to invest in the growing secular demand for advanced chips that are increasingly becoming vital to the global economy.
TSMC delivered 17% annualized revenue growth going back almost 30 years. The opportunities to provide the latest chip technologies for the growing demand in 5G wireless devices, data centers, and automotive applications should deliver more growth in revenue, profits, and dividends over the long term.
Investors can have confidence in TSMC's future due to its customer relationships and expertise in producing advanced process technologies. TSMC is also looking to expand its manufacturing footprint in the U.S., Japan, and China. These advantages allow TSMC to generate sky-high margins and pay regular dividends to shareholders. TSMC has raised the dividend by 61% over the last five years, bringing the current yield to 2.27%.
Even better, TSMC trades at a relatively low P/E of 14, which looks like a bargain as chip content increases in traditionally non-computing applications like transportation and industrial markets.
