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Buffett's Portfolio Hasn't Done This in 4 Years, Until Now

By Sean Williams – Jun 4, 2020 at 6:06AM

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Are we witnessing a changing of the guard in the Oracle of Omaha's investment portfolio?

For the past five-plus decades, Berkshire Hathaway (BRK.A -0.97%) (BRK.B -0.81%) CEO Warren Buffett has been in a class of his own on the investing front. According to Berkshire Hathaway's annual letter to shareholders, released in February, the per-share market value of Buffett's company has averaged a 20.3% annual gain since the beginning of 1965, compared to 10% on the nose for the benchmark S&P 500, inclusive of dividends paid. This difference may not sound jaw-dropping, but the aggregate gain over the past 55 years is 19,784% for the S&P 500 and 2,744,062% for Berkshire Hathaway.

Maybe now you have a better understanding of why Wall Street and investors pay very close attention to Buffett's words of wisdom and, most importantly, his investment activity.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

A changing of the guard in Buffett's portfolio?

One thing Buffett has made very clear over the years is that the financial sector -- and more specifically, bank stocks -- is his favorite place to park Berkshire's capital. Since the end of the fourth quarter of 2016, financials have remained the largest sector within Buffett's portfolio, ranging from a low of 32.6% of total assets as of March 31, 2017, to as much as 47.4% of invested assets on June 30, 2019.

But something has happened within the past couple of weeks that we haven't witnessed in Buffett's portfolio since 2016. Namely, financials are no longer the single biggest sector.

Through this past weekend, Berkshire Hathaway owned 13 financial stocks, including a variety of banks, insurers, credit-service providers, and a credit quality/analytics company. Combined, these financials were worth about $73.7 billion as of the end of May 2020. This represents 36.3% of Berkshire Hathaway's approximately $203 billion investment portfolio.

However, the value of Berkshire Hathaway's stake in Apple (AAPL -4.91%) has grown to $79.8 billion as of the end of May. This means information technology, or more specifically, Apple, now has more bearing on Buffett's portfolio than his entire financial sector holdings. In fact, at one brief point recently, Apple comprised more than 40% of the Oracle of Omaha's invested assets.

Wondering what's going on? Let's take a closer look.

A printing press creating one hundred dollar bills

Image source: Getty Images.

Two reasons financials have lost ground in Buffett's portfolio

In recent months, there look to be two clear trends that explain why Buffett's favorite sector is now playing second fiddle to information technology.

To begin with, Buffett has had a number of clearly defined sell targets within his portfolio. Over the previous two quarters, Berkshire Hathaway has reduced its holdings in investment bank Goldman Sachs (GS -1.56%) by more than 16 million shares, and it completely sold off its stake in insurer Travelers Cos. (TRV 1.15%), which totaled close to 6 million shares. Though Travelers was never a particularly large holding, disposing of more than 16 million shares of Goldman Sachs would equate to more than $3.2 billion in value as of this past weekend.

Why sell? Although Buffett hasn't exactly spilled the beans on why Goldman Sachs and Travelers are getting the boot, my personal belief is that a period of low inflation and weak economic growth to follow may be bad news for both companies. Goldman Sachs, the leader in global merger and acquisition activity, is likely to see dealmaking plummet in the quarters ahead. Meanwhile, Travelers could see headwinds from persistently low yields. Insurers typically reinvest their unused premium (known as float) into safe, interest-bearing assets, which, in the current environment, won't return much at all.

The second factor at work here is the strong likelihood of a coronavirus disease 2019 (COVID-19) pandemic-induced recession. Financial stocks, and especially banks, tend to be highly cyclical companies. This is to say that when the economy is humming along, bank assets are growing, and financials are making money. But when recessions strike, the Federal Reserve lowers its federal funds rate, leading to less net interest income for banks right as loan delinquencies rise. That's a recipe for earnings contraction, and it has adversely affected the valuations of many of Berkshire's financial sector holdings.

What is clear from Buffett's additions to Bank of America and U.S. Bancorp in recent quarters is that the Oracle of Omaha still very much values the financial sector, even if it's now No. 2 in Berkshire Hathaway's portfolio.

Two young teens playing with new iPhones in an Apple store

Image source: Apple.

The Apple of Warren's eye

Then again, we also know that Warren Buffett is a big fan of Apple and how CEO Tim Cook is guiding the company. Over the past year and a half, Berkshire Hathaway has doubled its money on Apple, proving that Buffett still has what it takes to spot a winner.

There's absolutely no question that Apple is a dominant force in the smartphone space, and the company has a veritable cult-like following for its products. When Apple does debut a new 5G-capable iPhone, it's likely going to generate a record amount of revenue from smartphone sales and benefit from a multiyear upgrade cycle.

But the Apple story is about more than just smartphones. Cook is transitioning Apple to be a major player in the services realm. In recent quarters, Apple has had little issue delivering double-digit growth in wearables and services, which are generally higher-margin categories than commoditized products like smartphones and tablets.

Buffett is also a big fan of Apple leaning on cheap cash to fund aggressive share buybacks as well as one of the largest dividends (in aggregate) in the world. That's because Buffett is also no stranger to borrowing at record-low rates, or repurchasing his company's stock at a perceived discount.

Long story short, this isn't a purposeful changing of the guard in Buffett's portfolio so much as it is representative of the recent underperformance and calculated selling of financials, and the outperformance of big tech stocks like Apple.

Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Travelers Companies, Inc. Stock Quote
The Travelers Companies, Inc.
$154.68 (1.15%) $1.76
Apple Inc. Stock Quote
Apple Inc.
$142.48 (-4.91%) $-7.36
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
$296.11 (-1.56%) $-4.68
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$406,700.00 (-0.97%) $-4,004.98
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$269.58 (-0.81%) $-2.20

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

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