Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett hasn't done anything flashy his entire life. But what he's done as an investor over five-plus decades has made him an absolute rock star on Wall Street.
Between 1965 and 2020, Berkshire Hathaway's stock has averaged an annual gain of 20% on the nose. By comparison, the benchmark S&P 500 has delivered an annualized total return ,including dividends, of 10.2%. This 9.8-percentage-point difference might not sound nominally unimpressive, but between 1964 and 2020, it equated to an aggregate outperformance of almost 2,800,000% for Berkshire Hathaway's stock, according to the company's latest shareholder newsletter.
Buffett's investing strategy has always been to buy companies that have sustainable competitive advantages and to hang on to those investments for long periods of time.
But what a lot folks overlook is that the Oracle of Omaha isn't big on diversification, as long as investors know what they're doing. Buffett believes in piling into a handful of businesses where he has a high level of long-term conviction. As of this past weekend, five Berkshire Hathaway holdings made up 71% of Buffett's $288 billion in invested assets.
Apple: $110 billion
Even after Berkshire modestly pared down its position, technology kingpin Apple (NASDAQ:AAPL) makes up a significant chunk of Buffett's investment portfolio. As of March 28, it accounted for 38% of Berkshire Hathaway's invested assets, and has been a holding for five years.
Buffett affably refers to Apple as Berkshire's third business. It grew into the largest public company in the U.S. by dazzling with its innovation and creating attachments with consumers. One need only look at the lines that seemingly wrap around Apple Stores anytime a new iPhone makes its debut.
The most recent quarter for Apple saw the company generate more revenue from iPhones than ever before. This comes as the company released its first-ever 5G-capable iterations of the device. Because wireless infrastructure upgrades won't happen overnight, 5G is likely to be a multiyear tailwind for Apple.
But equally exciting is Apple CEO Tim Cook's push into services and wearables. Cook is overseeing Apple's transformation into a platforms company, which should lead to less lumpy revenue recognition, higher operating margins, and an even more loyal base of consumers.
Bank of America: $40 billion
Although Berkshire has only, technically, been a Bank of America (NYSE:BAC) common stockholder since the third quarter of 2017, Buffett has been riding the BofA train to profits for nearly a decade. Buffett converted preferred stock in BofA, purchased in August 2011, into common stock in 2017.
Bank stocks are probably Buffett's favorite place to park his company's money. Even though banks are cyclical industries, they're natural moneymakers during periods of economic expansion. Since recessions are measured in months and expansions often last many years, bank stocks are primed for long-term success.
What's unique about Bank of America is that it's the most interest-sensitive of the money-center banks. This is to say that when interest rates begin to increase, the boost to interest income is going to provide the biggest benefit to BofA, relative to other big banks.
Bank of America has also done a stand-up job of reducing its noninterest expenses by consolidating its branches and encouraging customers to bank online or with its app. When coupled with its handsome capital return program, Buffett has no reason to believe BofA won't continue to be a winner.
American Express: $21.8 billion
Did I mention that Buffett likes financial stocks? Financial services company American Express (NYSE:AXP) has been a continuous holding for Berkshire Hathaway for approximately 28 years. That's the third longest-tenured holding in Berkshire's portfolio.
The buy thesis with American Express is really similar to BofA. Buffett is counting on the U.S. and global economy to grow over time, which'll lead to higher processing fees for AmEx, as well as the opportunity to rake in interest income and credit card fees. AmEx will incur its lumps from time to time during economic contractions, but it should benefit from multiyear periods of expansion.
One of the more fascinating things about American Express is its ability to court more affluent clientele. Dating back decades, an American Express gold or platinum card still holds a sort of allure to consumers that few other credit card brands bring to the table. The thing is, affluent cardholders are less likely to be shaken by minor economic disruptions. In theory, this should help American Express navigate its way through contractions and recessions better than most lenders.
A final note with AmEx: Berkshire Hathaway's cost basis is only $8.49 a share, yet the company parses out $1.72 in annual dividends. This works to a yield on cost of just over 20%.
Coca-Cola: $21.2 billion
Beverage giant Coca-Cola (NYSE:KO) happens to be Berkshire Hathaway's longest-tenured holding at 33 years, and I highly doubt Buffett has any intention of selling this 400-million-share stake anytime soon.
Coke's growth heyday might be in the past, but its position as a global beverage leader is nearly unrivaled. This is a company that has a presence in all but two countries worldwide (Cuba and North Korea) and sports a product portfolio with more than 20 brands that generate $1 billion or more annually. Furthermore, Coca-Cola controls an estimated 20% of the cold-beverage market in developed countries and 10% of the cold-beverage share in faster-growing emerging markets.
Aside from geographic reach and selling what might as well be a basic-need product, Coca-Cola's success is also a function of its superb marketing. It's one of the most recognized brands in the world, and it's done wonders to keep consumers engaged. Coca-Cola has holiday season tie-ins, has not been afraid to use social media to reach a new generation of consumers, and has a small army of well-known brand ambassadors.
With a cost basis of just $3.25 per share, Buffett and his investing team are netting an annual yield (based on cost) of a whopping 52%.
Kraft Heinz: $13 billion
Finally, there's consumer-packaged-goods company Kraft Heinz (NASDAQ:KHC), which may well be the biggest mistake in Berkshire Hathaway's portfolio. At $13 billion, Kraft Heinz accounts for about 4.5% of Berkshire's invested assets.
Buffett has plainly admitted that Heinz overpaid for Kraft Foods in 2016, leading to a combined company with a boatload of debt and goodwill on its balance sheet. In 2019, Kraft Heinz owned up to some of its mistake and wrote down more than $15 billion in goodwill. However, the company's debt load has constrained its efforts to innovate and boost marketing.
If there is a positive here, it's that the coronavirus pandemic has been a good thing for consumer-packaged goods companies like Kraft Heinz. With people staying home more than ever, demand for quick and easy meals picked up dramatically. Kraft Heinz's well-known brands and condiments have stood out in grocery aisles to multiple generations of shoppers.
For the time being, Buffett and his team are standing pat on their position in Kraft Heinz. With over 325 million shares owned, a 26.6% stake, it's not as if Buffett and his team can simply exit this position without potential cratering Kraft Heinz's share price.