Warren Buffett's Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) just filed its quarterly holdings with the SEC, and that filing provides us with an opportunity to get inside the head of the world's best investor -- and potentially follow his footsteps into some profit-friendly stock picks.
In the third quarter, the Oracle of Omaha didn't add any new stocks to Berkshire Hathaway's stock portfolio, but he did increase his bets on Apple Inc. (NASDAQ:AAPL), Monsanto (NYSE:MON), and Synchrony Financial (NYSE:SYF). Should you add these stocks to your portfolio, too?
Super-bullish on the supercycle
Once upon a time, Buffett told Steve Jobs to use the cash on Apple's balance sheet to buy Apple's stock. Jobs didn't listen, but even worse, Buffett didn't listen to himself, either. Buffett got a do-over when Apple's stock went into a tailspin because of a slowing of sales in China in 2016. This time around, he took his own advice and invested billions of dollars in Apple stock. He's been steadily increasing his position ever since.
To say that Buffett's investment in Apple has been a success so far would be an understatement. Shares in Apple have been climbing for more than a year on enthusiasm for its next-generation iPhones. Many Apple users didn't upgrade when the last iPhone was released, and that's led many to believe that we're about to enter an iPhone upgrade supercycle.
It will be a few quarters before we can really figure out just how many iPhone users are embracing the latest iteration of the iPhone, but that didn't stop Buffett from boosting his Apple bet by over 3.9 million shares last quarter. As of Sept. 30, Berkshire Hathaway owns 134.1 million Apple shares, and that means his investment in Apple is worth about $23 billion of Berkshire Hathaway's $182 billion equity portfolio.
Where Apple shares go from here will depend on how strong sales are this holiday season for iPhones, iPads, Macs, Apple Watches, and HomePods. Unfamiliar with HomePod? It's a Siri-powered virtual assistant that will become available in December.
While there are no guarantees on how the holiday season will shape up, I'm not willing to bet against Apple, and apparently, neither is Buffett. Apple is Berkshire Hathaway's third largest holding, and I doubt he'll be selling anytime soon. Instead, he'll probably continue to sit back, collect dividends, and watch as the supercycle pans out.
A money-making megamerger?
Buffett isn't the only one who wants to own Monsanto. Bayer AG (OTC:BAYRY) has been trying to win regulatory support to acquire Monsanto lock, stock, and barrel since last year.
Berkshire Hathaway came into 2017 owning 8 million Monsanto shares, and in Q3, it increased its exposure to Monsanto by 10% to 8.8 million shares. Apparently, Buffett thinks the deal is making headway toward getting the official nod. Bayer is offering $127.50 per share in cash, or $63.5 billion including debt.
Getting this merger done, however, is anything but a sure thing. The combination would create a seed and pesticides giant that could conceivably wind up with significant pricing power, particularly if it bundles together products in its contracts. For instance, an approval of this merger would mean that Bayer-Monsanto and DowDuPont (NYSE:DWDP) would control over three-quarters of the U.S. market for corn seeds. That kind of concentration is stoking fears of rising prices, and as a result, farmers are lobbying hard for U.S. and EU regulators to block the deal.
In August, the EU decided that Bayer AG was offering too little in the way of concessions to win an OK, so it opened a more in-depth review that's expected to lead to a decision in Q1 2018. In response, Bayer announced in early October a plan to sell various crop assets to BASF for $7 billion, if the deal is approved.
It's anyone's guess what happens from here, but regulators OK'd Dow's tie-up with DuPont and also allowed a Chinese conglomerate to acquire Syngenta, so the odds of getting the deal approved might not be as bad as some think. Perhaps improving optimism that the combination will close is why Monsanto's share price has moved higher and closed some, but not all, of the gap to the offer price.
Regardless, Monsanto doesn't appear to be the kind of long-term investment Buffett is famous for, so it might make more sense to pass on buying this stock unless you can afford the risk that the deal gets scuttled.
Cozy up to consumer credit
Berkshire Hathaway cozied up to consumer-credit company Synchrony Financial in the second quarter when it bought 17.5 million shares. In the third quarter, the buying continued, as Berkshire's position climbed to 20.8 million shares worth $677 million.
The position is relatively small for Berkshire, so it's likely that it's been Buffett's disciples who have decided to include Synchrony Financial in its portfolio. Nevertheless, it's an intriguing company that investors can consider buying.
Synchrony Financial is the private-label credit card business that GE Capital formerly owned and that General Electric (NYSE:GE) spun off in 2015. It makes most of its money from credit cards issued under retail brand names, including Amazon.com.
Shares fell into the bargain bin earlier this year, when Synchrony Financial wrote off more in bad debt than was expected. However, the company's third-quarter performance was solid, and with the holiday shopping season upon us, consumer credit spending should provide tailwinds.
That's not to say that the charge-off situation isn't a problem, but it appears to be manageable. As a percentage of total average loan receivables, net charge-offs increased to 4.95% in Q3 from 4.39% last year. That's not a great trend, but consumers are purchasing more, and the average interest Synchrony Financial is collecting on accounts is growing. Third-quarter loan receivables were 9% higher year over year, net interest margin increased 40 basis points to 16.74%, and net interest income increased 11% year over year to $3.9 billion.
Also, Synchrony Financial benefits from a growing online banking business that's providing it with a relatively inexpensive source of capital. In Q3, deposits grew to $54 billion, up 9%, and accounted for 73% of the company's loan funding, up from 71% last year.
Overall, as long as the economy is growing, unemployment rates are low, and millennials continue to embrace online banking, Synchrony Financial should be able to grow its profit, and that makes it an interesting stock to buy.