Looking for profitable investments? Start by looking at Warren Buffett's portfolio. His holding company, Berkshire Hathaway (BRK.A 1.57%) (BRK.B 1.42%), has posted average annual returns of nearly 20% since inception.
Two Buffett stocks in particular look like great buys right now.
Don't ignore this $135 billion technology bet
Buffett isn't known for his technology investments. But in recent years, technology stocks have dominated his portfolio. One of his biggest technology investments -- in fact, it's his biggest current investment right now regardless of sector -- is Apple (AAPL 0.50%). Berkshire's Apple position is currently worth about $135 billion. That's nearly half of the company's entire portfolio of publicly traded stocks!
What do Buffett and his team like most about Apple right now? It's an iconic company with strong customer loyalty. It has a history and brand name prestige that's difficult to replicate. It also has the scale and capital to compete in an industry where scale and capital matter greatly. Last year, for instance, Apple spent nearly $30 billion on research and development, up from just $6 billion a decade ago.
But perhaps the biggest reason Buffett loves Apple stock is because it's a cash flow machine. During the past decade, Apple has generated more than $700 billion in free cash flow. It's used this excess cash to ramp up innovation spending, institute huge share buyback programs, and pay out a small dividend.
It's important to note that Berkshire was a net seller of Apple stock last quarter, but Buffett has suggested that the sale was partially due to tax considerations. Buffett highlighted that it is "extremely likely" that Apple will remain Berkshire's biggest position through the rest of the year. At 29 times earnings, Apple stock price isn't exactly cheap, but it remains one of the best stock picks for those looking to follow Buffett's biggest bets.
This is still Buffett's number 1 stock
Warren Buffett has been a near-constant buyer of a certain stock for years. Most of his fortune is tied up in this stock, and lately his purchases have accelerated. We are, of course, talking about Berkshire Hathaway itself. Since 2014, its total share count has fallen by 13% thanks to a slew of share buybacks. Last year, Berkshire repurchased $9.2 billion of its own shares. In 2021 alone, it repurchased $27 billion in stock.
In a market where bargains are hard to come by, Buffett has been regularly snapping up Berkshire shares. With repurchases still in progress, it's clear that he still views the company's own stock as a good value. But there's another reason he's probably a fan of buying back more stock.
At the latest Berkshire annual shareholder meeting, Buffett revealed his belief that corporate tax rates would soon rise, a belief that at least partially led Berkshire to trim its Apple stake. "With present fiscal policies, I think that something has to give," Buffett noted. "Higher taxes are quite likely, and if the government wants to take a greater share of your income or mine or Berkshire's, they can do it. And they may decide that someday they don't want the fiscal deficit to be this large."
This snippet suggests that Buffett is conscious of tax liabilities when it comes to calculating total returns. This consideration makes buying back Berkshire stock a no-brainer. While the Inflation Reduction Act imposed a new 1% excise tax on buybacks, share buybacks are still more tax efficient than dividends. And if a company sees the value of its repurchased shares rise over the long term, it will face a lower tax bill than if it had invested the money elsewhere and harvested the gains.
In summary, Berkshire is a great vehicle for Buffett to efficiently direct cash to in a market with few bargains. Berkshire shares aren't the cheapest they've ever been trading at 1.6 times book value, but that's partially skewed by accounting rules that mask the book value accretion of share repurchases. Despite the above-average valuation, Buffett is still directing Berkshire to buy back shares. As with Apple, it's not the best bargain he's ever found, but it's likely still a wise bet with markets trading at lofty valuations.
