Berkshire Hathaway published its third-quarter results earlier this month, and some big numbers stood out. For one, CEO Warren Buffett and the analysis and management team at the investment conglomerate bought back $7.6 billion of the company's own stock. The report also indicated that the company was a net seller of other stocks, and it closed the quarter with a whopping $149 billion in cash reserves.
Buffett and Berkshire are keeping their powder dry and indicating that they're finding it more difficult to find great values in the market. Read on to see why a panel of Motley Fool contributors thinks Walmart (WMT 0.96%), United Parcel Service (UPS 1.38%), and Amazon (AMZN 1.21%) would be strong portfolio additions for the Oracle of Omaha.
Never dismiss an industry's undisputed leader
James Brumley (Walmart): Smart investors spend a lot of time making and updating investment plans, and rightfully so. However, often obscured by diversification pie charts, opening the right sort of accounts, projecting your portfolio's value, and automating your dollar-cost averaging work is the simple fact that picking good long-term stocks is still the most important piece of this puzzle. Berkshire's performance is proof that just buying and holding quality names -- and then leaving them alone -- works.
On that note, Walmart is a top name Berkshire doesn't currently hold but arguably should.
Surprised? That's understandable. The world's biggest retailer has most of the hallmarks of a Buffett-approved pick. Namely, it's a leader in a business that's easy to understand, and it can remain so indefinitely thanks to reliable cash flow.
That's not to suggest the company is indestructible. It can bump into headwinds, with some of them linked to its sheer size. Empty store shelves were an all too common occurrence for Walmart back in 2013, for example, as out-of-store executives lost touch with what was happening on the front lines. But the cool part about being the biggest and best-funded name in a particular industry is that you can buy your way out of problems. That's what the retailer is doing now, deploying $14 billion worth of investments in automation and supply chain efficiencies that will help it better compete with Amazon.
I'm surprised Buffett hasn't steered Berkshire back into Walmart after closing out a long-term position in the retailer back in 2018. It's certainly proved its mettle in the meantime.
UPS has a simple yet powerful investment thesis
Daniel Foelber (United Parcel Service): Berkshire Hathaway technically owns shares of package delivery giant UPS. But the stake makes up less than a hundredth of a percent of its portfolio. UPS is Buffett's smallest stock holding, but there are many reasons it deserves to be one of his largest.
If there are three things Buffett likes, it's dividends, entrenched moats that protect a business from competition, and steady long-term growth potential. UPS has all three of these attributes in spades.
UPS stock has a 2% dividend yield that's backed by an industry-leading company that generates a ton of free cash flow (FCF) and has a great balance sheet. The shipping and logistics industry is incredibly capital intensive. Entering the industry is one thing, but going toe-to-toe with a titan like UPS is quite another.
UPS is positioned to have its best year in company history with what should be a blowout fourth quarter. Unlike rival FedEx, UPS has expedited its hiring process to navigate the labor shortage and has done a better job handling supply chain issues. Limiting the need to reroute packages avoids delays and makes customers happy.
UPS's long-term growth outlook is beautifully simple. A few years ago, the company began directly targeting small and medium-sized businesses (SMBs) with the goal to become their preferred shipping and logistics partner. By giving them similar tools as larger e-commerce giants, UPS unlocked a new and growing customer base to complement its traditional residential and large business customers. It's also growing its healthcare and automotive shipping business. Aside from U.S. domestic, UPS's international and freight segments are its aces in the hole. Both segments consistently have high operating margins and are growing their top and bottom lines at double-digit rates.
For any investor who believes the economy will become even more connected, e-commerce is on the rise, and there's a future in shipping more things faster, UPS offers excellent value, income, and growth. That's a complete package that's right up Buffett's alley.
The "everything company" is built to win the future
Keith Noonan (Amazon): Warren Buffett has stated that his favorite period for holding a stock is "forever." That's admittedly a tall order. Finding companies that look poised to continue innovating and thriving over multiple decades is no small task, but few companies fit this bill better than Amazon.
Amazon currently makes up a very small portion of Berkshire Hathaway's overall stock holdings. However, with the investment conglomerate shifting toward a more growth-focused portfolio weighting in recent years and embracing technology stocks, it wouldn't be surprising to see the company increase its holdings in Amazon.
Berkshire's move to buy back its own stock and make a net reduction in other equity positions sends the message that the company is concerned that valuations in the market may be getting too hot to handle. On a surface level, that might suggest that Amazon and its $1.8 trillion market capitalization and forward price-to-earnings ratio of roughly 88 is unlikely to occupy a position at the top of Berkshire's "buy list."
Whether the market is currently overheated or there are years of continued bullish momentum yet to come, I think Berkshire and other investors could benefit from steadily building positions in Amazon stock. As Buffett has famously said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Amazon is undoubtedly a wonderful company, and it stands a very good chance of being the next decade's single most influential business. The tech giant already has leading positions in the e-commerce and cloud services markets, it's rapidly gaining share in digital advertising, and it's making big investments in potentially revolutionary technologies, including artificial intelligence, robotics, and electric vehicles.
In addition to a fantastic brand and strong moat, many of the tech giant's businesses have tremendous synergies with each other. Perhaps more so than any other company, Amazon is built to win the future.