Fishing in a stocked pond, so to speak, can be a great way to filter for new investments. And one of the greatest stocked ponds when it comes to investing ideas is Warren Buffett's Berkshire Hathaway portfolio.
Considering Berkshire's 20% annualized returns since 1965, compared to the 10% returns for the S&P 500 index, it would be foolish not to monitor what the Oracle of Omaha adds to each quarter.
Buffett's investments often tend to make capital preservation of paramount importance, making their picks even more interesting in today's bear market.
With that said, three Berkshire holdings, Apple (AAPL 0.52%), Amazon (AMZN -1.65%), and Kroger (KR -0.43%), make for great buys in a tricky market environment.
Apple's cash-flow machine is tough to beat
Bradley Guichard (Apple): Just how much do Buffett and Berkshire Hathaway like Apple stock? Enough to make it more than 39% of its total portfolio. This makes Berkshire one of Apple's largest stockholders. Berkshire began buying Apple stock in 2016 and has seen tremendous profits since.
A potential recession could hurt Apple's overall sales; however, this will likely be a short-term bump in the road. The company isn't showing noticeable ill effects so far as the fiscal second quarter of 2022 brought record revenue of $97.3 billion, up 9% over the prior year.
Apple's rumored new hardware-as-a-service initiative could also help keep sales flowing when consumers tighten budgets. This new program will allow people to purchase iPhones on a subscription plan by making monthly payments. This will help consumers who don't want to shell out the full price upfront and create a recurring revenue stream for Apple.
One reason to love Apple is the company's profitability and cash-flow generation. Apple pushed its operating margin for the first half of fiscal 2022 to 32%, beating the 30% margin posted in the same period last year. This brought $75 billion in cash from operations into Apple's coffers.
The stock buyback program is the second reason Apple is an excellent choice during a down market. Apple returns a tremendous amount of the cash it generates to shareholders through buybacks and dividends. The advantage of buybacks during a market downturn is that the company can repurchase and retire more shares for the same investment. This will then leverage shareholders' gains when the market resumes its climb. Apple's board has just approved another $90 billion in buybacks, and the program shows no sign of slowing.
Apple has repurchased $268.4 billion in stock and paid $49.9 billion in dividends since fiscal year 2019. This amounts to a combined 14% of the current market cap in just three and a half years. Investors can rest assured that even if Apple stock declines a bit in the short term, the impressive cash flow will keep rewarding shareholders in the long term.
Optionality will help Amazon weather the storm
Jeff Santoro (Amazon): Despite being caught up in the broader sell-off, Amazon is a Buffett stock that's still well positioned to succeed despite the bear market. Currently only a small portion of Berkshire's investments, Amazon has some potential growth drivers that could help it move up in Buffett's portfolio.
The day after Amazon reported its first-quarter 2022 earnings in April, the stock sold off 14% on fears of slowing growth, weak guidance, and an unexpected net loss. Considering the recessionary and supply chain issues serving as a backdrop, it shouldn't have been a surprise that Amazon saw its e-commerce business struggle. However, these headwinds are likely temporary and there were other bright spots in the earnings report.
Amazon Web Services (AWS) had another strong quarter, with revenue topping $18 billion, good for a 37% year-over-year increase. The cloud infrastructure business now has an annualized sales run rate of almost $74 billion. At the end of Q1 2022, AWS accounted for 16% of Amazon's total revenue, up from 13% in the year-ago quarter.
As AWS grows as a percentage of Amazon's overall business, profitability and margins should improve. As an example, in Q1, Amazon's overall operating income was $3.7 billion, with AWS contributing $6.5 billion. This more than made up for an operating loss of $2.8 billion in the other segments. The difference isn't always this stark, but AWS does typically have a higher operating margin, which allows Amazon to spend more on growing the e-commerce side of the business. These investments have helped Amazon keep its online retail advantage.
Another part of the business that doesn't get talked about enough is Amazon's advertising services. As of Q1 2022, advertising accounted for 6.8% of total revenue, up from 5.9% one year earlier. The company doesn't provide much detail on this part of the business, but it's worth keeping an eye on to see if it continues to grow over time. If it does, Apple is likely to give more color on margins and profitability.
There may be some slower quarters ahead as Amazon continues to fight inflation and supply chain headwinds. However, Amazon currently trades for a price-to-sales (P/S) ratio of 2.4, a multiple not seen since 2016. At this valuation, and considering the strength of AWS, Amazon shares look too cheap to ignore.
Bolster your portfolio's defenses with Kroger
Josh Kohn-Lindquist (Kroger): While Kroger and its massive chain of grocery stores are not immune to the inflation pressures currently facing the global economy, its defensive positioning in the consumer goods sector can benefit investors in a bear market. Kroger may operate on razor-thin margins as the only pure-play grocer in the S&P 500 index, but it sells seemingly recession-resistant products.
These resilient sales perhaps make Berkshire Hathaway's $1 billion holding in the company no surprise, as Buffett and Berkshire Hathaway Vice Chairman Charlie Munger often emphasize capital preservation with their investments.
As for Kroger's current operations, the company is laser-focused on building out its private-label offerings -- a move that lowers the prices of goods for customers and increases margins for investors. Kroger rolled out 239 new private label items in the first quarter of 2022, and reported Our Brands identical sales rose by 6% year over year, compared to storewide identical sales growth of 4% over the same time. It is clear that these cheaper options are resonating with customers.
These private label brands are critical as consumers naturally look for the best values when shopping during trying economic times. While the United States has yet to enter an official recession, Kroger has positioned itself to benefit should these struggles continue.
With management guiding for $3.85 to $3.95 in earnings per share (EPS) for 2022, Kroger trades around 12 times forward earnings -- the fourth-lowest valuation among its 36 S&P 500 peers in the consumer defensive sector.
This low forward price-to-earnings valuation is advantageous to individual investors and Kroger alike, as it has consistently lowered its share count over the last two decades through significant share repurchases.
KR Shares Outstanding data by YCharts
Thanks to the company continually lowering its total shares outstanding, its EPS has grown by 19% annually over the last five years, despite revenue only growing by 4% each year over the same period.
On top of this promising bottom-line growth, Kroger sports a 16-year dividend increase streak to pair with a 1.8% yield and meager 21% payout ratio. Thanks to this low payout ratio, it is reasonable to expect the company to continue raising its dividend far into the future -- despite having already boosted its payouts by 12% annually over the last five years.
Due to these fantastic cash returns to shareholders, the company's budding private-label operations, and its relatively cheap valuation, Kroger looks like a tremendous Buffett-style investment to buy and hold through trying economic conditions.
