There's a good reason that Wall Street and investors follow Berkshire Hathaway (BRK.A -0.87%) (BRK.B -0.86%) CEO Warren Buffett like a hawk: his incredible track record. Since the mid-1950s, Buffett has managed to turn $10,000 in seed investment capital into a personal net worth of more than $89 billion. And keep in mind, this doesn't take into account the tens of billions of dollars Buffett has donated throughout the years.
He's also created an incredible amount of value for his shareholders, with Berkshire Hathaway's share price appreciation leading to more than $400 billion in wealth creation for investors over the long run.
The big question often is, "What's Buffett going to buy next?" Rather than contemplate which of the more than 3,000 publicly traded stocks he could choose to invest in next, let's consider the very real possibility that he could add to one or more of his existing 48 holdings. After all, Berkshire Hathaway does have a record $128.2 billion in cash on hand.
This year, I'll be looking for the Oracle of Omaha to use some of his cash pile to add to following three positions.
Call it the biggest surprise of 2019, but Berkshire Hathaway opened a position in Amazon.com (AMZN -0.16%) for the first time ever. At 537,300 shares currently, Amazon accounts for $1 billion in value of Berkshire's $251.6 billion investment portfolio.
Interestingly, it wasn't Buffett himself who dipped his toes into the pond with Amazon. Rather, he credited one of his investment lieutenants for the purchase. These money managers, Ted Weschler and Todd Combs, are also free to make investments using Berkshire's cash on hand.
Amazon offers two particular attributes that are liable to attract Buffett, and especially his investment managers. First, there's the company's dominance in e-commerce, which is driven, in part, by its Prime memberships. Aside from offering consumers perks, Prime most importantly keeps users loyal to the brand in a highly competitive retail landscape. According to eMarketer, in June, Amazon was on track to account for 38% of all U.S. e-commerce sales in 2019.
Second, there's Amazon's under-the-radar giant, Amazon Web Services (AWS), the company's cloud services platform. It was predominantly targeted at small and medium-size businesses, but has become a go-to cloud platform for companies of all sizes. AWS' sales growth is currently more than double that of e-commerce, with cloud computing margins also considerably higher than the company's retail operations. Thus, as AWS grows as a percentage of sales, operating income and cash flow for Amazon should soar.
You might think Amazon is "expensive," but after being valued at an average of 30 times full-year cash flow over the past five years, the company is now valued at a mere 20 times Wall Street's estimated 2020 cash flow and just over 11 times 2022's estimated cash flow. Amazon is a reasonably inexpensive stock, and I believe that'll lead to Buffett and his team adding to the position in 2020.
Feel free to call this one the "no duh" of likely additions in 2020, but expect Warren Buffett to add to his recently opened position in Occidental Petroleum (OXY 0.53%).
During the third quarter, Berkshire acquired nearly 7.5 million shares of Occidental, which are currently worth about $343 million. This represents a relatively small 0.3% stake of Occidental's outstanding share count.
The real catalyst here that's likely to get Buffett even more involved is the $10 billion he committed to Occidental Petroleum in April to aid in the acquisition of Anadarko, which had received a competing bid from oil and gas giant Chevron. But the monster financial backing offered by Buffett appears to be one of a few factors that allowed Occidental to be the winner of the buyout sweepstakes.
In return for the $10 billion investment, Buffett received preferred stock in Occidental, as well as warrants that would allow for the purchase of as many as 80 million shares of common stock, with an exercise price of $62.50.
Following the investment, Occidental's share price proceeded to lose more than 30% of its value by early December, offering Buffett and his team a perceived discount. Buffett has, historically, favored downdrafts in stocks he's purchased, as it gives him and his team an opportunity to build a substantive position in a wonderful company at a fair price. As long as Occidental remains well below where Buffett initially took his stake, I'd have to believe the lure of betting on higher long-term oil prices by purchasing more shares of this integrated oil and gas company is very much on the table.
Last, but not least, Buffett has long been a fan of money center banks, and his love affair with banks paid off big time in 2019. When the curtain closed, some of Buffett's favorite bank holdings, such as Bank of America and JPMorgan Chase, had registered gains of 41% and 42%, respectively. What's interesting, though, is that perhaps the most conservative and consistent bank of the bunch that Buffett owns, U.S. Bancorp (USB -0.21%), "only" gained 28%, thereby slightly underperforming the benchmark S&P 500.
Throughout the years, Buffett has not been shy about adding to his stake in U.S. Bancorp, and I expect 2020 to be no different. A quick review of the company's most recent operating results shows it's still doing a lot right. U.S. Bancorp's return on assets was the highest among U.S. money center banks at 1.57% in the third quarter, with 8.1% year-over-year noninterest income growth.
Furthermore, the company's loan portfolio continues to demonstrate stellar growth prospects. Total loan growth was 4% from the previous year in the third quarter, with residential mortgage loans increasing by 10.6% (a function of low lending rates), credit card loans up 8.8%, and commercial loans rising 5%.
U.S. Bancorp's continued focus on the bread-and-butter of banking (loans and deposits) is liable to keep this stock as a Buffett favorite. Look for him to add to his stake in 2020.