Warren Buffett is widely regarded as the greatest investor in the world, and even at 91, he continues to steer the Berkshire Hathaway investment company to success.
The Oracle of Omaha has consistently outperformed the broader market, delivering an average annual return of 20% over his 55 years at Berkshire, which is double that of the benchmark S&P 500 index. With both the S&P 500 and the Nasdaq 100 technology index trading in a bear market, it might be worthwhile to treat Buffett's portfolio as a guiding light right now.
His picks often have a few things in common: The companies have diverse revenue streams, they're profitable, and they return money to shareholders. In other words, they're an ideal place to invest in this difficult market environment, so here are three of the best to own right now.
An Apple a day keeps the bears at bay
Apple (AAPL 1.27%) needs little introduction. It's the largest company on the planet with a $2.2 trillion market capitalization, and it's also Buffett's largest stock holding, representing 39% of Berkshire's $317 billion portfolio. Apple's household fame stems from its hardware products, but its services segment is the real growth driver right now.
The company's products business is headlined by the iPhone, which has an estimated 1.2 billion global users. But the iPad, Mac, and wearables (like the Apple Watch) are also notable contributors to its products revenue, which makes up about 82% of the company's total revenue. In the recent second quarter of 2022, this segment logged a modest 6.5% growth in sales, year over year.
That was handily beaten by the services segment, which generated a 17.2% revenue jump over the same period, though it's a much smaller piece of Apple's overall business. But with assets like Apple Music, Apple News, Apple Pay, iCloud, and the Apple TV+ streaming platform, Apple's services have quickly become a focal point for investors.
That's because hardware is costly to produce and can only be sold once, whereas Apple's services are often subscription-based with recurring revenue that maintains a very high gross profit margin above 70%. Speaking of which, Apple is highly profitable overall with $101 billion in net income over the last 12 months on $386 billion of total revenue, and it's returning truckloads of that money to shareholders -- which is no doubt why it's a Buffett favorite.
Aside from its quarterly dividend of $0.23 per share, representing an annualized yield of 0.68%, the company has a new $90 billion stock buyback program in place. That follows $43 billion in buybacks in the last two quarters alone, and $85 billion in Apple's 2021 full year.
Dominating e-commerce, the cloud, and so much more
Buffett has an interesting relationship with global e-commerce leader Amazon (AMZN -1.64%). He loves the company, but he has repeatedly expressed regret for not buying its stock much, much sooner. Berkshire acquired its first position in 2019, a full 22 years after Amazon's IPO in 1997. It makes up 0.4% of Berkshire's portfolio right now, with the position valued at about $1.1 billion.
Amazon is one of the most diverse businesses in the world. Its roots are in e-commerce, which still makes up the majority of its revenue, but it also leads the entire cloud services industry through Amazon Web Services (AWS), the company's profit engine. Additionally, it has a booming advertising segment responsible for $32.6 billion in sales over the last 12 months, and it also owns a stake in electric vehicle up-and-comer Rivian Automotive.
The cloud is arguably Amazon's most intriguing opportunity because, according to some estimates, the industry is set to be worth over $1.5 trillion annually by 2030. Given that AWS leads the sector with $67 billion in revenue over the past year, there's seemingly a very long runway for growth. In tough economic times when the e-commerce business might lag, AWS is a great asset to have in the toolbox.
Amazon is very profitable (though less so than Apple) with $21.4 billion in net income on a trailing-12-month basis, from $477.7 billion in revenue. The company doesn't pay a dividend, but it is returning money to shareholders through its brand-new $10 billion share buyback program.
Buffett missed the first 22 years of Amazon's growth, but you don't have to miss the next 22.
America's No. 1 digital bank
The last Buffett stock to buy for added safety in your portfolio is Ally Financial (ALLY 0.13%). It's a brand-new addition to Berkshire's holdings, and it's a great pick for investors looking for income thanks to its quarterly dividend of $0.30 per share, which translates to a 3.4% annualized yield.
Even with interest rates on the rise, that's a great return, especially when combined with the company's generous share buyback program. It repurchased $2 billion worth of stock in 2021 and has planned another $2 billion worth in 2022 -- keep in mind, Ally's market valuation right now is only $10.4 billion.
Ally's strength is its diverse product suite, which now spans across 10 categories including mortgages, car finance, and an investment platform, all of which it delivers online. Ally has no physical bank branches, so serving as many needs as possible is key to retaining customers and competing with much larger banks.
The company has the largest book of outstanding automotive loans in the U.S., topping $107 billion in the recent first quarter of 2022. It's a favorite among car dealerships and is now partnered with 21,700 of them across the country, which could drive over 13 million finance applications in 2022.
Ally has generated $8.54 in non-GAAP earnings per share over the last 12 months, which places its stock at a very attractive price-to-earnings multiple of just 3.8. That's a significant discount to the S&P 500, which trades at a multiple of 21.5, but banks may have a tough time going forward as rising interest rates dampen demand for loans.
With that said, Ally does pay a nice sum of income while investors wait for the broader economy to pick up steam again.
