Warren Buffett doesn't claim to be a great stock-picker. He maintains adamantly that he and his longtime associate Charlie Munger are instead "business-pickers." Of course, that ability to pick great businesses had resulted in plenty of fantastic stocks landing in Buffett's portfolio.
What's the best stock Buffett owns right now? It's not an easy decision. Here are my picks for the top three contenders.
1. Berkshire Hathaway
There's no doubt which stock is Buffett's personal favorite. It's Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%). That doesn't automatically make Berkshire Buffett's best stock. However, I put it at the top of the list for three key reasons.
First, Berkshire offers a significant level of diversification with one stock. It's nearly like buying an exchange-traded fund (ETF). Berkshire itself fully owns a wide range of successful businesses, including insurers GEICO and General Re, railroad operator BNSF, and renewable energy leader Berkshire Hathaway Energy. In addition, the conglomerate has stakes in more than 40 publicly traded companies.
Second, Berkshire's financial strength is rock-solid. The company generated leveraged free cash flow of $69.5 billion over the past 12 months. It ended the first quarter with cash, cash equivalents, and short-term investments totaling $102.7 billion. Buffett wrote in his latest letter to Berkshire shareholders, "We want your company to be financially impregnable." That's a great goal -- and one that continues to be achieved.
Third, Berkshire has been a huge winner for investors over the long term. Sure, there's no guarantee that the future will be as bright as the past. However, Berkshire's success is due in large part to the culture that Buffett has built. That culture will likely survive long after he's no longer at the helm.
2. Markel
You can take most of what I said about Berkshire Hathaway and apply it to Markel (MKL -1.17%) as well. Markel is one of the most recent additions to Berkshire's portfolio. It's also the best new Buffett stock, in my view.
Markel is basically a "baby Berkshire." Its market cap of under $17 billion is less than 3% the size of Berkshire. The company focuses on insurance (in this case, specialty insurance). It also owns a variety of other businesses outside of the insurance sector. And Markel invests in the stocks of other companies, notably including Berkshire Hathaway.
In short, Markel's business model is a lot like Berkshire's. Its core business is inflation-resistant, helping Markel stock to handily outperform the overall stock market this year.
I think that over the next decade, Markel could even top Berkshire's performance. It helps that the company is smaller. But Markel's investments also include more higher-growth stocks than Berkshire's portfolio does.
3. Apple
Buffett referred to Apple (AAPL 1.27%) as one of Berkshire's "four giants" in his recent letter to shareholders. That's an apt description. Although Berkshire owns only 5.6% of Apple, the tech stock represents a whopping 41.8% of Berkshire's total investment portfolio.
Apple doesn't offer the level of diversification that Berkshire and Markel do. However, it's hard to find a company with greater customer loyalty. Apple is also managed exceptionally well. In 2020, Buffett said that Apple is "probably the best business I know in the world." Earlier this year, he wrote that Apple CEO Tim Cook is "brilliant."
Through the years, Apple has built an extremely sticky ecosystem centered around its iPhone. The company routinely delivers solid growth thanks to the increased demand for ancillary products and services in this ecosystem as well as its annual iPhone upgrades.
Sure, Apple stock is down quite a bit so far in 2022. That's mainly due to the overall stock market weakness, although the company continues to face some supply chain challenges as well. But those are only temporary issues. With growth opportunities in augmented reality and self-driving cars, Apple should remain a big winner for Buffett.
