Few investors have been as successful as Berkshire Hathaway (BRK.A -0.42%) (BRK.B -0.56%) CEO Warren Buffett. Over the past 57 years, the Oracle of Omaha, as Buffett is now known, has delivered an average annual return of 20.1% for his company's Class A shares (BRK.A). In aggregate, we're talking about a gain of better than 3,600,000%, which compares to a 30,209% increase, including dividends paid, for the S&P 500 over the same period.
Because of Warren Buffett's incredible track record, it's not uncommon for investors to ride his coattails. Thankfully, because Berkshire Hathaway is required to file Form 13F with the Securities and Exchange Commission every quarter, this is pretty easy to do. A 13F is effectively a portfolio snapshot that allows investors to see what the brightest minds on Wall Street were buying, selling, and holding in the most recent quarter.
However, Berkshire Hathaway's 13F doesn't tell the full story. Due to an acquisition in 1998 of reinsurance company General Re, Buffett's company owns a specialty investment firm known as New England Asset Management (NEAM). Although Buffett isn't involved in NEAM's investment portfolio, the securities NEAM buys are, ultimately, owned by Buffett's company.
When the June-ended quarter came to a close, 87% of Warren Buffett's more-than-$5.9 billion "secret portfolio" was invested in just five stocks.
Apple: 47.24% of invested assets
Perhaps it's no surprise that New England Asset Management's largest holding by invested assets happens to be the stock that's Berkshire Hathaway's largest holding by a long shot: tech leader Apple (AAPL -0.60%). Apple accounted for roughly $2.8 billion of NEAM's $5.92 billion in assets under management, as of June 30, 2022.
What's made Apple such an incredible investment for so long? Both its innovation and its capital return program.
Innovation has helped Apple become the most-valuable brand in the world, according to a report by Kantar BrandZ. The continuing evolution of Apple's iPhone has fueled a loyal customer base and driven sales and profits to record heights.
However, Apple's future is all about promoting subscription services. CEO Tim Cook is presiding over this multiyear transition that will see Apple become more of a platform company. Doing so should boost its operating margins over time, and reduce the sales lumpiness often associated with product replacement cycles.
As for capital returns, Apple has one of the largest nominal dividend payouts on the planet, and has repurchased approximately $520 billion worth of its own common stock since the beginning of 2013. In other words, there's a very good reason Apple is the largest publicly traded company by market cap in the U.S.
U.S. Bancorp: 13.76% of invested assets
Warren Buffett is a big fan of bank stocks, and apparently so is the investment team that's overseeing Warren Buffett's secret portfolio. Regional bank U.S. Bancorp (USB -1.29%), the parent of the more-familiar U.S. Bank, accounted for close to 13.8% of invested assets at the end of June and has been a continuous holding in NEAM's portfolio for more than two decades.
The foundation for U.S. Bancorp's rock-solid operating performance is financial discipline. While most of its peers were making riskier derivative investments prior to the Great Recession, U.S. Bancorp has predominantly stuck to what I call the "bread and butter" of banking: growing its loans and deposits. This may not generate jaw-dropping sales and profit growth, but it does ensure some of the highest return on assets among large banks.
Additionally, U.S. Bancorp has done a phenomenal job of encouraging its customers to bank online or via mobile app. As of May 31, 82% of its active customers were banking digitally, with 64% of total loan sales being completed online or via mobile app. The latter is up from just 45% at the beginning of 2020.
Digital transactions are substantially cheaper for banks than in-person or phone-based interactions. As a result, U.S. Bancorp has been able to lower its noninterest expenses by consolidating some of its physical branches.
Bank of America: 11.96% of invested assets
Yet another huge Berkshire Hathaway holding that also makes up a sizable percentage of Warren Buffett's secret portfolio is Bank of America (BAC -0.49%). Whereas NEAM holds close to 22.8 million shares of BofA, Berkshire Hathaway has north of 1 billion in its portfolio.
What makes a money-center giant like Bank of America such an attractive investment is simply time. Even though recessions are an inevitable part of the economic cycle, periods of expansion last considerably longer. Being patient and allowing the U.S. economy to grow over time is what allows a company like BofA to increase its loan portfolio and net interest income.
Another reason Bank of America looks like a stellar investment is its interest-rate sensitivity. With the Federal Reserve having no choice but to aggressively raise interest rates to rein in historically high inflation, Bank of America is set to generate billions of dollars in added net interest income on its outstanding variable-rate loans without having to lift a finger.
And don't overlook the capital return potential of bank stocks, either. When the U.S. economy is humming along, it's not uncommon for a giant like BofA to return in excess of $25 billion, annually, to shareholders via share buybacks and dividends.
HP: 9.12% of invested assets
Warren Buffett's secret portfolio loves a good value stock. That's exactly what NEAM is getting with personal-computing and printing solutions company HP (HPQ 3.81%), at a valuation of less than 7 times Wall Street's forward-year forecast earnings.
The answer to "Why HP?" can be boiled down to three catalysts. First, PC and printing solution sales tend to be highly predictable, even during periods of economic weakness. This is a mature industry that produces plenty of cash flow -- and Wall Street does love companies that are predictable.
Secondly, New England Asset Management's investment team is probably just as enamored as Warren Buffett has been with HP's capital return program. The company increased its base annual payout by 29% in 2021, and has been aggressively repurchasing its common stock. For companies with steady or rising net income, a shrinking outstanding share count can boost earnings per share and make a stock appear more fundamentally attractive to investors.
Thirdly, at less than 7 times forecast earnings for the upcoming year, HP's shares probably have a safe floor built in. Even if the company has few near-term upside catalysts, there's probably not a lot of additional downside, either.
Chevron: 5.26% of invested assets
Rounding out the top five holdings in Warren Buffett's secret portfolio is oil stock Chevron (CVX 0.53%). During the second quarter, HP and Chevron were New England Asset Management's two biggest buys.
One of the reasons Chevron is such a successful energy stock is its integrated structure. Though it generates its juiciest operating margins from its upstream drilling operations, Chevron also owns midstream (transmission pipelines) and downstream (chemical plants and refineries) assets. Midstream assets typically rely on fixed-fee or volume-based contracts that produce very predictable cash flow. Meanwhile, chemical plants and refineries benefit from lower input costs when the price of crude oil falls. In other words, Chevron is well hedged no matter what happens to the prices of oil and natural gas.
However, the next couple of years bode well for oil stocks. Due to the COVID-19 pandemic, global energy majors have purposely pared back their capital investments. That and Russia's invasion of Ukraine make it clear that increasing global oil production is going to be a lengthy and arduous process. That's good news for drilling companies that are counting on a sustainably higher price for crude oil.
To keep with the theme of this list, "big oil" companies like Chevron are also well-known for their bountiful capital return programs. In the wake of historically high oil and natural gas prices, Chevron has pledged to repurchase up to $10 billion worth of its common stock this year, and it pays out one of the largest nominal dividends. Having what's arguably the best balance sheet among integrated oil companies affords Chevron the freedom to reward its long-term investors.