Warren Buffett famously said to be greedy when others are fearful. Putting that mantra to work netted him tens of billions of dollars during the Great Financial Crisis. As individual investors, we don't have access to the deals Buffett got, but buying shares of the best companies -- the ones you know will be around for decades -- is a great way to take advantage when all of the stock charts turn red.
That's why I'll be adding shares of Apple (AAPL 0.88%), Disney (DIS -1.72%), and UnitedHealth Group (UNH -0.20%) during the next major sell-off. Market crashes come and go, but these companies are likely to play dominant roles in the economy far into the future.
What better way to honor Buffett's approach than by purchasing shares of one of his largest holdings. At the end of the first quarter, Berkshire Hathaway owned 5.4% of the iPhone maker. Since releasing that signature device in 2007, the company has leaned on its operating system to create what is sometimes called -- both admiringly and derisively -- a "walled garden." It's the ecosystem of hardware, software, and services that makes everything work so well together and the company's products so hard to give up.
The company has been expanding its product offering through wearables -- think Apple Watch and AirPods -- and services. In the past 12 months those two categories have generated $95.5 billion in revenue. That's doubly impressive. First, it means Apple's sales not counting iPhones, iPads, and Macs were still more than companies like Target, UPS, Facebook, and Lowe's. Second, it's 35% more than they combined for in the fiscal year that ended September 2019.
It's not just the secondary categories that are booming. In the latest quarter, every major product category set a new all-time record for active devices. All those sales generate excess cash, and management is returning a lot of it back to shareholders. Since its first full year with a regular dividend in 2013, the payout has gone up 115% and the company has bought back more than one-third of the shares outstanding. Add it all up and you get market-beating returns from a company that can weather any downturn in the market.
Another company with the products -- in its case content -- to stand the test of time is Disney. Although the company will always be associated with its animated movies and theme parks, it has become a media juggernaut. The acquisition of assets from 21st Century Fox in 2019 only cemented its dominance. In addition to its iconic branded parks around the world, it can boast of Pixar, ESPN, the ABC network, Marvel comics, Star Wars, a controlling stake in Hulu, and a cruise line, among other assets. The pandemic has dented revenue, but the rapid adoption of its Disney+ streaming app has mitigated any impact on the stock price.
In the six months ended April 3, revenue was down 18% year-over-year. That led to operating income falling 65%. That doesn't seem like much when you consider how many aspects of the company's business were affected by COVID-19. Film and television production was suspended, releases delayed, cruise ships docked, and parks were closed or operating at limited capacity. Despite all of that, the stock is up 47% in the last year and nearly 20% since the beginning of 2020. That disconnect is largely due to subscriber growth on Disney's streaming platforms.
|Service||Q2 2021 Paid Subscribers||Q2 2020 Paid Subscribers||Growth|
|Disney+||103.6 million||33.5 million||>200%|
|ESPN+||13.8 million||7.9 million||75%|
|Hulu||41.6 million||32.1 million||30%|
The company's foray into streaming content couldn't have come at a better time. It's bolstered the stock despite declining revenue and profit. It is also management's top priority.
When asked about reinstating the dividend -- it was suspended in May of last year -- CEO Bob Chapek made it clear that funding the direct-to-consumer effort (e.g. video streaming) was number one in terms of capital allocation. It's a clear sign that tradition won't get in the way of monetizing its content in the best way possible. In a new era of media, the century-old company is stronger than it has ever been.
3. UnitedHealth Group
The company is by far the largest U.S. health insurer with $261 billion in trailing-12-month revenue. As of the end of 2020, it provides coverage for 26.2 million people. About 78% of UnitedHealth's revenue comes from insurance premiums collected. Much of the rest was the result of products and services offered by Optum, its technology and services business. Optum itself has three business segments focused on pharmacy services, analytics and consulting, and health and wellness.
It might surprise people to learn that Optum generates nearly as much operating profit as the legacy insurance operations. Its services are also growing faster and more profitable as a whole. That's true even though the insurance arm benefited from so many people putting off care in 2020. When they didn't seek treatment the company didn't have to pay claims.
|Segment||2020 Revenue Growth||2019 Revenue Growth||2018 Revenue Growth|
|Segment||2020 Operating Margin||2019 Operating Margin||2018 Operating Margin|
Now that the Affordable Care Act (ACA) has withstood the latest Supreme Court challenge -- it also survived cases in 2012 and 2015 -- the healthcare system as we know it is unlikely to change anytime soon. That should remove uncertainty that pushed the stock to as low as 12.5 times cash flow from operations (CFFO) in May of last year.
Although the stock will be less volatile than most in a sell-off, a swoon back to that multiple would be 14% below the current price. If it gets there when the market crashes again, I'll be adding shares to my portfolio.