Warren Buffett's penchant for picking great stocks for Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) portfolio makes his quarterly stock picks must-know news for every long-term investor. Luckily, Buffett is required to file a 13F report with the Securities and Exchange Commission every quarter showing what he's been buying, and that makes following in his footsteps easier. Last quarter, his top buys were U.S. Bancorp (NYSE:USB), Apple, Inc. (NASDAQ:AAPL), and Teva Pharmaceutical Industries (NYSE:TEVA). Should you buy these stocks for your portfolio, too?
Bigger bets in banking
Wells Fargo's been Warren Buffett's biggest bank holding for a long time, but he's shown a willingness to invest in Wells Fargo's competitors, too. The Bank of New York Mellon (NYSE:BK) was his favorite bank to buy in Q4 2017, but in Q1 2018, U.S. Bancorp was his favorite. He bought 3.8 million U.S. Bancorp shares last quarter, increasing his position to 90.8 million shares, and now, Berkshire Hathaway is U.S. Bancorp's third largest institutional investor.
Market-leading profitability makes it easy to see why Buffett is such a fan of U.S. Bancorp. The company, which makes money by providing traditional banking services and managing wealth for high-net-worth individuals and institutions, reported a best-in-class 14.9% return on average common equity in the first quarter, up from 13.3% in the same quarter of 2017. To put that figure in better perspective, the return on average equity across all U.S. banks was 8.4% exiting 2017.
Clearly, U.S. economic growth and a year-over-year increase in the stock market are making money lending and money management very good businesses to be in right now.
Where U.S. Bancorp may really shine versus rivals, though, is in the quality of its loans. It probably isn't lost on Warren Buffett that even at the height of the Great Recession, U.S. Bancorp still turned a profit. The fact that only 0.62% of its loans are 90 days or more delinquent or non-performing probably impresses him, too. For comparison, the average rate for all U.S. banks was 1.17% in December.
In Q1 2018, reported net revenue grew 3.9%, after excluding tax reform impacts on tax exempt assets, due to a 5.5% increase in net interest income (loans and interest on its investments) and a 0.6% improvement in non-interest income (payment services revenue, trust and investment management fees, deposit service charges, etc.). And total net interest income was $3.2 billion, up $167 million year over year because of tailwinds associated with rising interest rates and loan growth.
Average earning assets increased 3.1%, or $12.6 billion, from one year ago as average total loans grew 2.3%, or $6.2 billion, and average investment securities grew 2.5%, or $2.7 billion, compared to last year.
Importantly, the spread that U.S. Bancorp earned between the interest it receives on loans and the costs associated with those loans, or its net interest margin, clocked in at 3.13% in the quarter, up from 3.06% year over year. The uptick is a good reminder that in periods of rising interest rates, loans can be more profitable because the rates banks charge on loans tends to increase faster than their costs.
Non-interest income in the quarter was $2.3 billion due to 6.5% growth in payment services revenue, 8.2% growth in trust and investment management fees, and 5.8% growth in deposit service charges. Improving credit and debit card revenue, corporate payments revenue, and merchant processing revenue helped boost payment services while business growth, asset inflows, and rising markets supported trust and investment management fees. New accounts and higher transaction volumes were behind the increase in its deposit service charges.
While this isn't a new bank in Berkshire Hathaway's portfolio, I think Buffett's willingness to increase his exposure to it suggests that he believes U.S. Bancorp's success isn't waning any time soon. Given his track record, I wouldn't bet against him.
|Company||Shares Held||Shares Purchased in Q1 2018||Change in Shares Held||Value|
|Teva Pharmaceutical||40,539,710||21,663,989||114.77%||$823 million|
|U.S. Bancorp||90,847,721||3,788,844||4.35%||$4.6 billion|
|Apple, Inc.||239,567,633||74,233,671||44.9%||$44.7 billion|
Upping Apple (again!)
Warren Buffett is in love...with Apple. He usually shies away from technology stocks because he finds them difficult to understand, but since he added Apple to Berkshire Hathaway's portfolio in 2016, he's had an insatiable appetite for Apple stock.
In Q1, he took his stake in Apple, which was already his biggest investment, to new heights, adding 74.2 million shares. As a result, he's now sitting on nearly 240 million Apple shares worth nearly $45 billion as of this writing, and based on comments he made when he disclosed his Q1 purchases a few weeks ago, he could continue buying more.
There's good reason Warren Buffett's become so enamored by Apple. In 2016, Apple's stock was struggling because of concern that sales were stagnating in China. Since then, Apple's shares have marched to new highs following the introduction of next-generation iPhones, yet millions of Apple users have yet to upgrade their aging phones, and that suggests there's plenty of running room for demand to support Apple's next products when they come out later in 2018.
In fiscal Q2, Apple reported quarterly revenue of $61.1 billion, up 16% from one year ago, and quarterly earnings per diluted share were $2.73, up 30% from the same quarter last year.
Apple's resiliency has been great news for its ecosystem. The company's services-based business, including apps and iTunes, is humming along, and it appears on track to deliver on Apple's long-term goal for revenue between 2016 and 2020 to double. The fiscal Q2 was Apple's best ever for services, with sales growing more than $2 billion year over year to over $9 billion.
The company's quarterly performance wasn't just all about phones, which grew 14% year over year, or services, which grew 31% year over year. Wearables revenue also surged, growing nearly 50% from last year.
Apple's plans for future growth hinge largely on making its electronic devices more useful to consumers, and recent decisions to focus on healthcare initiatives that increase their importance to aging Americans only insulate it more against competitive threats.
If Apple continues to wow consumers, Warren Buffett's going to benefit big time. Apple's financial position is dramatically improving following tax reform, and with profits soaring, Apple's dividend and buyback program could get a lot bigger.
Getting in on generics
Berkshire Hathaway, Amazon.com, and J.P. Morgan (NYSE:JPM) announced earlier this year that they're forming a new joint venture to reshape healthcare in America. The project is being spearheaded by Warren Buffett prodigy Todd Combs, the money manager that's also responsible for adding Teva Pharmaceutical shares to Berkshire Hathaway's portfolio in Q4 2017.
Teva Pharmaceutical is the biggest generic drug maker on the planet, but its stock has been plagued by competition that's crimping pricing power and an onerous mountain of debt that it took on as part of its decision to buy Allergan's generic-drug business in 2016 for $33.43 billion in cash and about 100 million shares.
Allergan finished selling its Teva Pharmaceutical shares earlier this year, and perhaps, that was one more reason Combs decided that he wanted to own more shares in the company. In Q1, Berkshire Hathaway's Teva Pharmaceutical position increased by a whopping 115%, and as of March 31, Berkshire Hathaway is now the drugmaker's third biggest investor.
The belief appears to be that Teva Pharmaceutical will overcome its struggles, including lost sales to competitor Mylan Labs following the FDA approval of its generic version of Teva Pharmaceutical's top-selling drug, Copaxone. In the fourth quarter, Copaxone's declining sales caused Teva Pharmaceutical's revenue to tumble 16% and its non-GAAP EPS to slide 32.6% from Q4 of 2016. The damage continued in Q1, when a 40% drop in Copaxone revenue caused revenue and adjusted EPS to slip 10.4% and 11.3%, respectively, versus last year.
Eventually, Copaxone will find its footing, and a cost-cutting program and new management could allow the company to pull up from its tailspin. The cost-cutting plan alone could reduce expenses by $3 billion per year, yet it's hard to say when revenue will level out, especially given the risk of additional Copaxone competitors becoming available.
From Berkshire Hathaway's perspective, the rewards associated with the long-term opportunity for generic drugmakers outweigh the risk. Drug spending continues to increase because of an increasingly larger and older population, and payers' interest in low-cost alternatives is a huge tailwind for Teva Pharmaceutical over time.
Overall, I suspect Warren Buffett and Todd Combs will continue to use any weakness in Teva Pharmaceutical shares as a buy opportunity for Berkshire Hathaway, but in my view, Teva Pharmaceutical is riskiest of these three stocks to add to your portfolio. Until the company's future becomes clear, perhaps it makes sense to look for other ideas to buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Todd Campbell owns shares of Amazon and Apple. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares). 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.