Warren Buffett has established one of the better-known track records of stock market success. Since his company publishes its stock holdings quarterly, it may be tempting for investors to copy his formula.
However, many of his holdings are likely better to hold than buy at current prices. Hence, investors need to perform some due diligence on these individual stocks. That analysis would likely lead to Buffett's stock itself, Berkshire Hathaway (BRK.A -0.05%) (BRK.B 0.19%), and one of his more recent purchases, Chevron (CVX -2.33%) as good investment ideas right now.
Picking Warren Buffett's company as a "Warren Buffett stock" may seem like a cop-out at first glance. But the choice makes more sense when considering the company repurchased 9% of the shares outstanding in 2020 and 2021. Also, in the first quarter alone, the company acquired more than 2,000 A shares and nearly 7,000,000 B shares. Each A share is equivalent to 1,500 B shares.
Berkshire consists of various investments, many of which are private. Nonetheless, stock investors likely know Berkshire Hathaway best due to Buffett's portfolio of publicly traded companies.
Also, with the increasing influence of lieutenants, the company is in transition. Today, owning Berkshire means investors will have to accept that Apple makes up nearly 40% of the stock portfolio, a stunning change for an investor who once shunned tech. But it also includes traditional Buffett picks such as Bank of America, Coca-Cola, and American Express.
Such companies contributed to the $70.8 billion in revenue earned in Q1. This came in almost 10% higher than the year-ago quarter. Still, net earnings fell 53% to $5.6 billion over that period due to 11% expense growth and $2 billion in investment and derivative contract losses.
The stock has fallen by about 15% amid a generalized sell-off in recent weeks. However, over the last year, it is up 9% in a market where the S&P 500's total return dropped by 2%.
Moreover, the stock trades at a price-to-earnings ratio of just eight, a low multiple that may relate to Buffett's advanced age and the different investing styles of his lieutenants. But with that discounted valuation and the revenue growth, one can understand Buffett's decision to buy his own shares.
Chevron may also seem like a strange pick at first glance, especially as the auto industry's focus in recent years has centered around electric vehicles (EVs).
Yes, Chevron announced the purchase of Renewable Energy Group in February for just over $3 billion in cash. But in the most recent quarter, all of its income came from oil and gas-related activity in its upstream and downstream segments.
Additionally, petroleum and natural gas made up nearly 69% of U.S. energy consumption in 2020, according to the Energy Information Administration. Thus, investors should not write off the oil giant or its main revenue sources anytime soon.
Buffett began buying Chevron shares in late 2020. Just before this purchase, Chevron acquired Noble Energy at the height of the pandemic. Since the shutdowns dramatically lowered revenue for a time, that feat speaks to the strength of its balance sheet. This also occurred while archrival ExxonMobil took on about $21 billion in debt in 2020 to cover dividends and address production declines.
Buffett's bet on oil prices looks like a winner. In Q1, Chevron earned nearly $6.3 billion on more than $54 billion in revenue. It also generated $6.1 billion in free cash flow. This allowed it to fund $2.7 billion in dividend expenses.
That dividend is probably one of the more notable benefits of owning Chevron. At the current level of $5.68 per share, it offers a cash return of about 3.5%. The payout has also risen for 35 straight years, a streak that likely drew Buffett's attention.
Furthermore, Chevron stock is up by more than 55% over the last year, a welcome relief when numerous S&P 500 stocks have fallen into a bear market. And despite that increase, it sells for just 16 times earnings, only slightly higher than the more troubled ExxonMobil. Considering its valuation, growth rate, and generous dividend, Chevron could remain a Buffett stock for a long time to come.