What industries does Warren Buffett like the most? Banking and insurance deserve to be at the top of the list. Airlines would fall in there somewhere as well. And although it wouldn't rank as highly, healthcare is an area the Oracle of Omaha has found attractive through the years.
Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) owns stakes in several major healthcare stocks. I think three of his favorites are great buys for investors right now: DaVita (NYSE:DVA), Johnson & Johnson (NYSE:JNJ), and Apple (NASDAQ:AAPL). Is Apple a healthcare stock? Yep. Read on to find out why.
Just a couple of years ago, DaVita ranked among Berkshire Hathaway's top 10 holdings. While that's no longer the case, it's not because the large dialysis provider has fallen out of favor. Berkshire has simply bought more shares of other companies while keeping its position in DaVita steady.
Technically, Buffett himself didn't buy DaVita for Berkshire. The decision was made by one of Buffett's right-hand men, Ted Weschler, who previously owned the stock when he ran his own hedge fund. But DaVita didn't become a major holding for Berkshire without Buffett's blessing. The company also checks off several of the boxes for the legendary investor, including a solid management team and a steady cash flow.
DaVita stock hasn't performed well in 2017. One problem stems from the company's relationship with American Kidney Fund, a nonprofit organization that provides financial assistance for dialysis patients. The U.S. Department of Justice issued subpoenas to DaVita and rival Fresenius Medical Care. This investigation stems from concerns that American Kidney Fund could favor patients using the two large dialysis providers over other patients who used smaller dialysis clinics that don't donate to the organization.
This pullback presents an opportunity buy the stock at a discount, in my view. DaVita's long-term prospects still look good. An aging population should translate to more patients needing dialysis. The company also continues to expand through acquisitions.
Johnson & Johnson
Berkshire has owned Johnson & Johnson since 2006. However, Buffett slashed his stake in the healthcare giant by around 95% in 2012 after the company recalled products several times. Buffett said at the time that J&J had "some wonderful products and a wonderful balance sheet, but too many mistakes have been made."
In retrospect, the biggest mistake appears to have been made by Buffett himself. Over the last five years, the total return for Johnson & Johnson stock has topped that of Berkshire Hathaway. J&J's dividend, which currently yields close to 2.4%, made the difference.
Johnson & Johnson stock is beating Berkshire so far in 2017 even without the impact of dividends included. Acquisitions have been key to the company's success. J&J bought Abbott Labs' medical optics business in early 2017 to beef up its medical device segment. It also bought Swiss drugmaker Actelion this year, picking up a strong pulmonary hypertension franchise.
I view Johnson & Johnson as one of the best big pharma stocks on the market. Its dividend is great, and a deep pipeline should provide new products over the next few years that drive more growth for the company.
That leaves Apple. Why include Apple as a healthcare stock? The company is making a big play at the healthcare market with its devices, especially Apple Watch. Apple could also be gunning for an even larger presence in the healthcare market.
There has been a lot of speculation recently that Apple could develop an electronic health record (EHR), especially after the company secured some patents that could pave the way to do so. CNBC recently reported that Apple has looked into buying medical clinics. None of this should be all that surprising, considering that Apple CEO Tim Cook has openly expressed the company's interest in healthcare as a significant business opportunity.
And we know for a fact that Buffett really likes Apple stock. Berkshire has continued to scoop up shares of the tech giant even with the stock soaring close to 50% year to date. There's a lot for Buffett to like about Apple, with its enormous cash flow and enviable pricing power.
In my opinion, there's a lot for any investor to like about Apple. The company appears to be in good position to continue growing earnings by double-digit percentages for years to come. With shares trading at only 14 times expected earnings, the stock isn't expensive. Don't forget about Apple's dividend, either. I'm sure Warren Buffett hasn't.
Keith Speights owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Johnson & Johnson. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.