Warren Buffett's ability to pick profit-friendly stocks for Berkshire Hathaway's (BRK.A -0.69%) (BRK.B -0.63%) portfolio has made him one of the most emulated investors in history. Fortunately, following in Buffett's footsteps is easy, because big investors like Berkshire Hathaway must file a 13F report with the Securities and Exchange Commission every quarter.
While Warren Buffett favors value stocks, he's willing to buy growth stocks when the price is right. For example, Berkshire Hathaway's latest report shows he owns Moody's Corporation (MCO 0.59%), Apple Inc. (AAPL 0.32%), and Costco Wholesale (COST 0.88%) All three are growing at a double-digit rate, and each may deserve a spot in your portfolio. Read on to learn why.
IMAGE SOURCE: MOTLEY FOOL.
Cashing in on credit
A strong global economy makes now a good time to be in the debt business, particularly the debt-ratings business, and that's good news for Warren Buffett because Berkshire Hathaway owns 24.7 million shares in Moody's, a leader in rating, researching, and analyzing debt instruments and securities.
Moody's recent performance probably has Buffett smiling. In the fourth quarter of, 2017, Moody's revenue grew 24% year over year to a record $1.2 billion. U.S. revenue increased 15% to $614.4 million, and non-U.S. revenue, which accounts for 47% of total revenue, increased 35% to $551.1 million.
The company's investors' service segment's sales grew 19% year over year to $724.7 million in the quarter because of increasing issuance of U.S. investment-grade and speculative-grade bonds, European and Middle Eastern speculative-grade bonds and bank loans, and Asian investment-grade bonds. Year-over-year growth was strong throughout the segment:
- Corporate finance revenue grew 20%
- Structured finance revenue grew 13%
- U.S. and non-U.S. structured finance revenues grew 17% and 5%, respectively
- Financial institutions revenue grew 34%
- U.S. and non-U.S. financial institutions revenues grew 36% and 33%, respectively
- Public, project, and infrastructure finance revenue grew 16%
- U.S. and non-U.S. public, project, and infrastructure finance revenues were up 14% and 18%, respectively.
Moody's Analytics segment was no slouch last quarter, either. Its sales increased 32% to $440.8 million and, while some of that increase was due to acquiring Bureau van Dijk, its sales still grew 13% year over year if you back that deal out.
The bottom-line performance in Q4 was also impressive. Adjusted operating income was $518.5 million, up 22% year over year, and adjusted earnings per share (EPS) was $1.51, up 20% year over year.
Overall, Moody's revenue improved 17% to a record $4.2 billion in 2017, and its $6.07 in adjusted EPS was up 23% from 2016.
There's no guarantee this company's winning ways will continue, but management's 2018 guidance is for double-digit revenue growth and adjusted EPS of between $7.65 to $7.85. That outlook suggests Moody's stock may still be worth buying.
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A very big bite of Apple
Apple Inc. has been one of Warren Buffett's best-performing investments. The consumer electronics giant first showed up in Berkshire Hathaway's portfolio in early 2016 when shares were in the doldrums due to worry of slowing iPhone demand in Asia. Buffett has been continuously increasing his stake in the company ever since, and as of Dec. 31, Berkshire Hathaway owns a staggering 165.3 million shares worth $29.4 billion at current prices.
In his recent letter to investors, Buffett said he bases his decision to buy on four factors: competitive strength, high-grade management, good return on assets (ROA), and sensible purchase prices. Apple seems to checkmark all those boxes.
Its iPhones accounted for nearly 20% of all smartphones sold in Q4, according to Gartner, so it's got competitive strength. It's run by Tim Cook -- one of the best operating managers in the business -- so that's a check, too. As for its return on assets, Apple's trailing 12-month ROA is 14%, which is better than other technology giants', including Microsoft, which boasts a trailing 12-month ROA of 4.9%. Finally, Apple's shares aren't as cheap as they once were, but Apple's forward P/E ratio of 13.5 still isn't very high.
Only Buffett knows when he'll sell his shares, but Apple's best days might still be ahead of it and, if so, then there's reason to think Apple's going to remain in Berkshire Hathaway's portfolio for a while.
In addition to continuing to rack up sales of computers, tablets, and smartphones, the company's only beginning to scratch the surface of its opportunity in the Internet of Things and healthcare.
To compete in the connected-home market, Apple recently launched its first digital assistant, the HomePod. If HomePod can help it establish a foothold, it could open up important new opportunities for Apple to help consumers manage their homes. According to Gartner, the market for virtual digital assistants alone will reach $3.5 billion in 2021.
The company's potential to transform healthcare could be an even bigger opportunity, though. Healthcare is a $3.3 trillion market in the U.S., and increasingly Apple's taking action that indicates it plans to shake the sector up. Its Apple Watch, for example, includes technology that can track heart rhythm and report abnormalities that could catch a deadly heart condition called atrial fibrillation early on. In January, Apple announced that patients can store their electronic health records in Apple's ecosystem; earlier this week, CNBC reported that Apple's planning to open medical clinics that leverage technology to improve preventative care for its employees.
Given Apple's past success and the fact that these market opportunities are huge, it wouldn't surprise me if Buffett's interest in Apple is long-term.
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Why this retailer should be a member of your portfolio
Warren Buffett's business partner, Charlie Munger, sits on Costco Wholesale's board of directors, and the two of them have been longtime owners of the big-box retailer. Berkshire Hathaway owns 4.3 million Costco Wholesale shares, making it Costco's 16th-biggest shareholder.
Costco Wholesale makes its money by buying in bulk and selling products to consumers at cut-rate prices. It also profits from the membership fees it charges people to become its customers. A basic membership costs consumers $60 per year, but a gold membership, which allows consumers to get 2% back on purchases, costs $120 per year. The company reports its financials on a fiscal calendar, and in the fiscal first quarter ending Nov. 26, membership fees contributed $690 million in revenue, up from $630 million the year before.
Its 91 million cardholders appear to be pretty happy, too. Costco Wholesale's member retention rate is 90%, and its net sales grew 13.3% to $31.1 billion in fiscal Q1. The company's same-store sales in fiscal Q1 were up by double-digit percentages and, thanks to a renewed focus on e-commerce, Costco Wholesale's online sales grew 43.5% year over year.
| Costco's Comparable Sales in Fiscal Q1 | 12 Weeks | 12 Weeks w/o Gas Inflation & FX |
|---|---|---|
| U.S. | 10.30% | 8.70% |
| Canada | 11.30% | 4.30% |
| Other international | 10.10% | 8.20% |
| Total company | 10.50% | 7.90% |
| E-commerce | 43.50% | 42.10% |
Data source: Costco Wholesale. Table by the author.
The number of Costco cardholders has increased by over 10 million in the past three years, and I think that membership growth will continue supporting revenue and profit upside. Additionally, online sales only represent about 4% of Costco Wholesale's total revenue, so there's plenty of room to expand that business. Furthermore, Costco Wholesale's foot traffic should benefit from decisions by other retailers, including Sears and Sam's Club, to close stores. Those reasons could make adding Costco Wholesale to your portfolio a smart move.
