Warren Buffett's track record for buying money-making stocks for Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) $200 billion portfolio makes Berkshire's holdings must-know news. Luckily, Buffett is required to file a 13F report with the Securities and Exchange Commission every quarter that reveals his latest stock picks. The newest filing just came out, and it shows Berkshire Hathaway was very busy in the second quarter of 2018. In addition to buying more shares in his biggest holding, Apple Inc. (AAPL +1.17%), he increased his ownership of Goldman Sachs (GS +2.01%), Delta Air Lines (DAL +3.46%), Southwest Airlines (LUV +4.51%), and U.S. Bancorp (USB +1.01%) by more than 10% last quarter.
Apple: Still Buffett's top stock
Apple's been a big money-maker for Buffett's Berkshire Hathaway, and based on his increasing his position in the consumer electronics and services business last quarter, Buffett doesn't expect Apple's shares to drop anytime soon.
IMAGE SOURCE: THE MOTLEY FOOL.
The iconic maker of the iPhone first showed up in Berkshire Hathaway's portfolio back in 2016, and he's added more shares every quarter since. After acquiring 12.4 million more shares in Q2, Berkshire Hathaway's initial $1 billion stake has grown to nearly 252 million shares worth a staggering $53 billion. For perspective, Berkshire owned 165 million shares worth about $28 billion at the end of 2017.
Despite a big run-up in Apple's shares over the past year, Buffett appears convinced that Apple's valuation still presents an opportunity for additional upside. He could be right. According to International Data Corporation (IDC), global smartphone sales fell 1.8% year over year in the second quarter, yet Apple's iPhone unit sales increased about 1% to 41.3 million. Because iPhones command premium pricing, that translated into Apple iPhone revenue jumping 20% year over year in the quarter, which in turn helped Apple's total sales grow 17% year over year to $53 billion.
Importantly, an increase in global active users drove revenue for Apple services, such as apps and iTunes, up 28% in the past year. Apple also reported solid performance for its tablets, computers, watches, and headphones, and overall, Apple's bottom line improved 40% to $2.34 per share because of growing demand for its high-margin products and services.
Apple is undeniably more expensive on price to sales and price to earnings metrics than it was when it first showed up in Berkshire Hathaway, but despite both valuation measures rising to five-year highs, Buffett still hasn't started taking any of his profit from the stock off the table. It's anyone's guess if Apple will remain Berkshire Hathaway's biggest position, but there are plenty of iPhone consumers still using old iPhones, and with a product refresh coming this fall, the company could still be in a position to deliver double-digit sales and profit for a while longer.
| Company | Shares Held | Shares Bought in Q2 2018 | Chang in Shares Held | Value |
|---|---|---|---|---|
| Apple Inc. | 251,955,877 | 12,388,244 | 5.17% | $52.8 billion |
| Goldman Sachs | 13,254,490 | 2,294,971 | 20.94% | $3 billion |
| Delta Air Lines | 63,665,840 | 10,066,483 | 18.78% | $3.4 billion |
| Southwest Airlines | 56,547,399 | 8,887,943 | 18.65% | $3.3 billion |
| U.S. Bancorp | 100,693,874 | 9,846,153 | 10.84% | $5.3 billion |
Positions current as of June 30, 2018. Data source: Berkshire Hathaway SEC form 13F, filed Aug. 14, 2018.
Filling up on financials
Warren Buffett has been a big investor in financial stocks for a long time, but it's Goldman Sachs and U.S. Bancorp that appear to be his favorite stocks in the industry right now.
In Q2, Berkshire Hathaway's position in investment-banking giant Goldman Sachs surged 20% to 13.2 million shares, making it Goldman Sach's fourth-largest institutional investor. Buffett's attraction to Goldman Sachs could indicate that he believes the spike in volatility investors witnessed earlier this year will continue, which would be good news for Goldman Sachs' trading revenue.
In Q1, the investment bank's fixed income, currency, and commodity (FICC) trading revenue increased 23% year over year, and its equity trading revenue grew 38%. In Q2, equity revenue was flat year over year, but FICC revenue increased 45% to $1.68 billion. Couple strength in that business with double-digit growth in its other products and services, including investment management, and you have a recipe for higher profits. For example, Goldman's diluted earnings per share was $12.93 in the first half of 2018, up from $9.10 in the comparable period of 2017.
Buffett has also become a bigger fan of U.S. Bancorp this year. In Q1, he bought 3.8 million shares, and in Q2, he added 9.8 million shares, bringing Berkshire's total ownership in the bank to 100.6 million shares valued at about $5.3 billion.
U.S. Bancorp provides traditional banking and wealth management services to high-net-worth individuals and institutional investors, and that niche has rewarded investors with one of the best returns on average common equity in the industry. In Q1, its ROCE was 14.9%, and in Q2, it was 15.3%. For perspective, the return on average equity across all U.S. banks was about 11% in Q1.
The company's business model also results in industry-leading loan quality. In Q1, only 0.62% of its loans were delinquent by 90 days or more, or non-performing, and in Q2, the rate was 0.55%. For comparison, the delinquency rate for all U.S. banks was 1.71% in Q1.
Given that U.S. Bancorp's net interest income and its noninterest income increased by 4.9% and 2.8% year over year last quarter, its track record for industry-leading financials performance, and a strong economy supporting its target market, Berkshire's buying of its stock might continue.
IMAGE SOURCE: GETTY IMAGES.
Top airline stock picks
Perhaps Buffett's decision to buy airlines in Berkshire Hathaway's portfolio is among the most surprising investment decisions he's made in recent memory. The airline industry has historically suffered big pops and drops due to fickle consumers and gyrating fuel costs, and because of the track record of bankruptcies, Buffett has said in the past that the industry represents a "death trap" for investors.
Nevertheless, a slate of airlines showed up in Berkshire Hathaway's portfolio last year, and so far this year, Buffett appears to be narrowing his focus to two in particular: Delta Air Lines and Southwest Airlines. Although American Airlines (AAL +4.49%) and United Continental (UAL +6.80%) remain in its portfolio, Berkshire Hathaway sold shares in each of those operators last quarter. Instead, it added to positions in Delta Air and Southwest, the two companies that, perhaps unsurprisingly, have the best trailing-12-month operating margins.
Southwest's 15% margin is best, but Delta isn't far behind, at 12.9%. For comparison, American and United Continental's trailing-12-month operating margins are about 9%.
American Airlines' second-quarter performance was less than inspiring. Fellow Motley Fool Adam Levine-Weinberg has detailed the nuts-and-bolts behind American's struggles, but to paraphrase, the company is facing stiffening competition and big cost increases, and it has a yoke attached to its growth in the form of a heavy debt load.
Granted, Delta Air and Southwest aren't immune to industry challenges facing peers, but they arguably have structural advantages supporting their better operating profits. In Delta's case, it has fewer regional jets than American, which allows it to maximize per-seat profit at its Atlanta hub. Delta's management told investors in July that its non-fuel unit costs will flatten out and turn negative by the end of the year, and if that happens, its operating margin could be about to head even higher.
Southwest has long been considered one of the best low-cost airline operators in the business because of its use of smaller-market airports. However, an accident that resulted in one patient death earlier this year weighed down the company's second-quarter financials and took a toll on its share price. However, the company's hedging activity should ease some cost headwinds associated with rising fuel prices, and management's confident demand will rebound. If they're right, then Buffett's decision to use weakness in the second quarter to increase Berkshire's Southwest position could pan out.
