Berkshire Hathaway has served as Warren Buffett's investment vehicle for over 50 years, and the legendary investor was busy buying shares of several stocks in the first quarter.
Out of the dozens of stocks Berkshire reported holding in Q1, three Motley Fool contributors selected Apple (AAPL 0.52%), Coca-Cola (KO 0.31%), and Amazon (AMZN -1.65%) as great companies worth buying in this bear market. All three possess strong brands that can power through a rough economy and deliver great returns for decades.
Iconic brands will survive hard times
John Ballard (Apple): If you're going to piggyback the greatest investor of all time, why not start with his biggest bet. At the end of the first quarter, Berkshire held 890 million shares of Apple worth $155 billion on March 31. It's one of the biggest investments Buffett has ever made.
Years ago, investing in a company that makes pricey electronics might not have been the best move in a weak economy when people are cutting back on unnecessary expenditures. But Apple has become so entrenched in people's daily routine that it can be considered a relatively safe stock to hold through a bear market. That doesn't mean the stock won't fall further. The shares have already fallen 25% from their recent high, but successful investing only requires that you buy great businesses when they are available at fair prices and hold them for many years. That's Buffett's basic approach in a nutshell.
It's hard not to see the value underpinning Apple. The stock trades at a reasonable value of 21.5 times earnings per share. Apple is not expensive, given that the average business has traded around 16 times earnings over the last century. Berkshire Hathaway even added slightly to its Apple stake in the last quarter, so Buffett, or one of his investing deputies, clearly views the stock as a good value right now.
Apple has hit it out of the park with its line of Macs and iPads featuring the company's new proprietary M1 processors. In fact, in a quarter when total PC shipments slowed, Apple was one of the handful of manufacturers that gained market share in worldwide PC shipments in Q1 at the expense of the leaders Lenovo and HP.
AAPL Cash from Operations (TTM) data by YCharts.
Apple generates a mountain of cash from operations, which funds reinvestments in new products and technologies, and most importantly, growing dividends and share buybacks. Over the last five years, Apple has spent nearly $500 billion on capital returns to shareholders. Apple's tremendous stream of profits from selling products people love to use every day is a good reason to buy the stock in a bear market.
Coca-Cola has become a staple in people's homes for decades
Parkev Tatevosian (Coca-Cola): For several decades, Coca-Cola stock has been a mainstay in Warren Buffett's Berkshire Hathaway portfolio. The iconic beverage brand has done an excellent job of sustaining its dominance at the top of the non-alcoholic drinks market. Millions, if not billions of people worldwide, have consumed one of Coca-Cola's portfolio of drinks daily.
KO Revenue (Annual) data by YCharts.
That has catapulted Coca-Cola to earning revenue of $38.6 billion in 2021. That was up 17% from the $33 billion it earned in 2020. Coca-Cola has established many exclusive relationships with away-from-home channels like restaurants, theme parks, and movie theaters. As a result, it suffered a revenue decrease due to the pandemic. The reverse is now playing out. Coca-Cola benefits as the world progresses against COVID-19, making people more comfortable leaving their homes.
Meanwhile, Coca-Cola has worked on removing waste in its operations, which has boosted its operating profit margin from 22.4% in 2012 to 28.6% in 2021. That margin improvement is likely to play a crucial role in shareholder sentiment as rising inflation puts profit margins at risk in all types of businesses.
KO Operating Margin (Annual) data by YCharts.
Moreover, during a bear market, investors place greater importance on companies with sustainable profits. Given that consumers have, for decades, developed a habit of drinking one of Coca-Cola's beverages, it is unlikely they will break the pattern if they lose their job or have their incomes reduced. For those reasons, Coca-Cola is one of my top Warren Buffett stocks to buy during a bear market.
When the market is down, stick with the best
Jennifer Saibil (Amazon): Amazon stock has drawn a lot of attention recently because of its stock split. But this top stock is an excellent choice because of its well-run business and robust opportunities. When the market takes a turn for the worse, focusing on strong stocks that can survive is key to maintaining a solid portfolio.
Stock split aside, Amazon has demonstrated its worth as a company in challenging times. It's the largest e-commerce company in the world, accounting for as much as 50% of all online sales. Although sales growth is slowing down, the company is still moving in the right direction, increasing sales 7% year over year in Q1.
The company is definitely under some pressure right now. Between rising costs and wages, inflation, and huge investments to build up its capabilities to meet increasing demand at the beginning of the pandemic, Amazon posted a net loss in Q1. It would have posted an operating loss as well if not for the continued phenomenal performance of Amazon Web Services (AWS), which posted a 37% year-over-year increase in revenue and a 55% increase in operating income to $6.5 billion.
But it's well positioned, and perhaps the best positioned of almost any company, to thrive when the chips are down. Despite a slight decline in Q1, its e-commerce unit is still posting massive sales. As of the last update, in April 2021, there were 200 million Prime users, but management said there were millions of new members added since then. They depend on it for their everyday essentials, and CFO Brian Olsavsky said Prime members are a "key driver of growth." Renewal rates are high as well. In its favor, Amazon highly relies on its third-party sales, which means it doesn't have the same inventory problem Target and Walmart are dealing with.
During a bear market, keeping your funds in time-tested, solid stocks can protect your portfolio, and Amazon fits the bill.
