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Warren Buffett's Top 3 Stocks of 2017 Will Surprise You

By Eric Volkman – Updated Dec 27, 2017 at 10:13AM

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In Berkshire Hathaway's portfolio full of familiar stocks, several of the lesser-known issues soared during the year.

The portfolio of Warren Buffett's Berkshire Hathaway (BRK.A -0.06%) (BRK.B -0.95%) is stuffed with many famous stocks. Most of these have done well in 2017, which is one major reason that Berkshire has done so well -- the total market value of its portfolio has risen from $129 billion at the end of 2016 to nearly $190 billion at the close of the third quarter this year. 

Three of Berkshire's stocks have risen by over 50% so far in 2017. One of those companies, Apple, is an extremely well-recognized company, and a top pick among many investors. The other two, however, aren't as renowned.

Close-up of Warren Buffett

Image source: The Motley Fool.

In the mood for growth

Apple is only No. 3 out of Berkshire's top trio for the year.

In first place is a stock that's rarely on anyone's must-own list: credit rating agency and research concern Moody's (MCO -1.40%). Yet the company has been on fire lately, delivering strong revenue and profitability growth. Its most recently reported quarter beat estimates with revenue leaping 16% higher year over year (to just over $1 billion), and net income ballooning by 24% to $317 million.

A jump in international revenue bolstered the top line, while organic growth and acquisitions padded net profit.

As an investment, Moody's is a model Buffett stock. The company has landed consistently in the black on an annual basis, although this profitability has been somewhat up-and-down over the years. Revenue, meanwhile, almost doubled since 2010; operating and free cash flow have risen even more sharply.

Moody's core business, its credit rating operations, forms a very wide moat. It's the star rating agency with only a very few competitors of similar power and influence; its ratings can often make or break a new debt issue. These days, money is still quite cheap to borrow so many companies are going to the well -- and having their debt evaluated by Moody's.

It's no wonder the company's managed to grow so much. And it's hardly surprising that the stock has risen by almost 60% in 2017. Berkshire holds $3.7 billion worth of Moody's shares, for a nearly 13% stake in the company.

Sign of the times

The No. 2 performer in Berkshire Hathaway's big bag of stocks is VeriSign (VRSN -1.40%), the price of which has climbed by nearly 52% in 2017. The company performs crucial registry, infrastructure, and indexing operations for the internet, and offers online security services.

Since VeriSign holds the exclusive rights to operate the registers for the top-shelf .com domain (plus the lesser .net, and a clutch of minor domains), it's got one of those nice moats Buffett is so fond of. The company's slowly but steadily increasing revenue and consistent profitability are reflective of this, as is its typically chunky net profit margin (almost 39% in fiscal 2016, 35% the year before).

Unlike Moody's in recent years, VeriSign hasn't been a particularly fast grower. In its Q3 the company managed to increase its top line by less than 2%, while adjusted net profit inched up slightly more by 4% (all told, revenue was $292 million for the period, and net profit came in at just under $115 million).

VeriSign is a relatively recent investment for Berkshire and Buffett; it was purchased in 2013. Profitability and wide moat aside, it's actually not a typical one. For decades, Buffett diligently avoided tech stocks (he once counseled to "never invest in a business you cannot understand," and tech didn't fit the bill).

Buffett has changed his stance, however; these days his company holds nearly $1.5 billion worth of VeriSign stock for a 13% stake. The share price has increased by almost 51% in 2017. 

A crystal ball in Nebraska

It's quite a feat for a stock in a portfolio run by one of the best investors of all time to overperform in a particular year. Apple, which has (for the most part) been an outstanding company dating back to the dawn of the iPhone in 2007, was almost a no-brainer as an investment choice. But choosing Moody's and VeriSign shows a clever, sensible, and patient approach to the market.

In other words, an investment style entirely in character for the Oracle of Omaha.  

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Moody's. The Motley Fool owns shares of VeriSign and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short January 2018 $105 calls on VeriSign, and short January 2018 $100 puts on VeriSign. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$406,470.00 (-0.06%) $-230.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$267.02 (-0.95%) $-2.56
VeriSign, Inc. Stock Quote
VeriSign, Inc.
VRSN
$173.70 (-1.40%) $-2.47
Moody's Corporation Stock Quote
Moody's Corporation
MCO
$243.11 (-1.40%) $-3.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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