If you've ever wondered why Wall Street pays so much attention to billionaire investor Warren Buffett, look no further than his track record as CEO of Berkshire Hathaway (BRK.A 0.16%)(BRK.B 0.10%). Since becoming CEO in 1965, the Oracle of Omaha has nearly doubled the average annual total return of the broad-based S&P 500, including dividends (20.1% versus 10.5%).
This outperformance continued during the 2022 bear market. Despite a 19% decline in the S&P 500 last year, Berkshire Hathaway's stock gained 4%. In other words, it pays to know what Warren Buffett is buying and selling because he has a tendency to run circles around the broader market.
Thankfully, 13F filings with the Securities and Exchange Commission and Berkshire Hathaway's quarterly operating results give us a clear look at what's piquing the interest of Buffett and his investment team. As we barrel ahead into 2023, Warren Buffett is betting big on the following five stocks.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Chevron
Perhaps the biggest shift in Warren Buffett's investment approach last year was the amount of capital he and his team put to work in energy stocks. Topping that list was the integrated oil and gas company Chevron (CVX 2.16%). In a two-year stretch beginning Oct. 1, 2020 and ending Sept. 30, 2022, Buffett's company spent an estimated $20.9 billion buying shares of Chevron.
Prior to 2022, energy stocks had not comprised more than 8.9% of Berkshire Hathaway's investment portfolio this century. Last year, this weighting rose to as high as 13% and is a clear indication that Buffett and his team believe energy commodity prices will remain high for the foreseeable future.
Ultimately, supply and demand dictate where the spot price of crude oil will head. With Russia invading Ukraine and global energy companies underinvesting in drilling, exploration, and infrastructure during the COVID-19 pandemic, the global supply of crude oil and natural gas is in question. Since it's unlikely that the supply of these energy commodities can be quickly increased, supply-and-demand economics would state that modestly higher demand could lead to sustainably higher price points for crude oil and natural gas.
In addition to higher energy commodity prices, Buffett has to be impressed with Chevron's much-improved balance sheet and beefed-up capital-return program. Through the first nine months of 2022, Chevron's net debt shrunk from $25.7 billion to $8.2 billion. To boot, Chevron has increased its base annual dividend in each of the past 35 years.
NASDAQ: AAPL
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Apple
Maybe the least-surprising stock Warren Buffett is betting big on in the new year is tech-stock Apple (AAPL +2.59%). I say "least surprising" because Apple is already Berkshire Hathaway's largest position by a considerable amount. However, that hasn't stopped the Oracle of Omaha from continuing to add to this stake.
Although innovation has been the cornerstone of Apple's valuation for decades, it's truly been the driving force since the company introduced the iPhone in 2007. Since the debut of 5G-capable iPhones two years ago, Apple has pretty consistently accounted for around half of all smartphone market share in the U.S.
But Apple is about more than the physical products that have brought it acclaim. For years, it's been expanding its universe of subscription services and steadily evolving into a platform-based company. Subscription services offer sustainably high margins and double-digit sales growth. Most importantly, as services grow into a larger percentage of Apple's total sales, it'll minimize the revenue swings that can accompany iPhone replacement cycles.
Apple's capital-return initiatives are also top-notch. Since the beginning of 2013, it has repurchased $554 billion worth of its common stock. For some context, only five S&P 500-listed companies have a market cap above $554 billion; Apple is one of them.
Image source: Getty Images.
Occidental Petroleum
It's not just Chevron that's caught the attention of Warren Buffett and his team within the energy space. Last year, Berkshire Hathaway acquired more than 194 million shares of Occidental Petroleum (OXY 5.42%), which is in addition to the $10 billion in Occidental preferred stock yielding 8% annually that Buffett's company has held since 2019.
The drivers for Occidental Petroleum are very similar to Chevron, but with a few added twists. While both companies can benefit from sustainably higher crude oil and natural gas prices, Occidental's revenue mix is even more skewed than Chevron's to drilling. This means a higher price per barrel for West Texas Intermediate (WTI) crude oil could really pump up Occidental's operating cash flow.
On the other side of the coin, Occidental's balance sheet is a mess when compared to Chevron's. Whereas Chevron has one of the lowest debt-to-equity ratios among oil and gas stocks, Occidental has been buried in debt following its 2019 acquisition of Anadarko Petroleum. Although the company has successfully reduced its net long-term debt by $15 billion over the past two years, it'll still need WTI crude prices to remain elevated to further whittle down its $20.5 billion in net long-term debt, as of Sept. 30, 2022.
Despite these leverage concerns, Occidental Petroleum has reinstated its share-buyback program and expects to continue chipping away at its long-term debt.
NYSE: TSM
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Taiwan Semiconductor Manufacturing Company
The Oracle of Omaha and his team are also betting big on foundry-giant Taiwan Semiconductor Manufacturing Company (TSM +1.97%), which is better known as "TSMC." Berkshire Hathaway purchased in the neighborhood of $4 billion worth of TSMC shares in the third quarter of 2022.
While there are likely a few reasons for this purchase, the most logical is that TSMC is Apple's sole supplier of silicon processors. Every product Apple makes that utilizes silicon processors is fabricated by TSMC. With more than 37% of Berkshire's invested assets tied up in Apple, it makes sense to bet on the success of one of Apple's core suppliers.
Another reason for Buffett and his investment team to be excited about TSMC's prospects is its sheer size. It's the largest foundry in the world and seemingly has its proverbial fingers in every industry where semiconductor solutions are involved.
Although a combined 80% of its fabrication revenue derives from smartphones and high-powered computers, the company is now generating 10% of its sales from Internet-of-Things (IoT) devices and 5% from next-gen automobiles. IoT and automotive are sustained double-digit growth opportunities.
Taiwan Semiconductor is also doling out a market-topping 2.4% yield. Buffett has always appreciated publicly traded companies that reward patience from their shareholders.
NYSE: BRK.B
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Berkshire Hathaway
The fifth stock Warren Buffett is betting big on in 2023 is none other than his own company, Berkshire Hathaway. Since mid-July 2018, he and executive vice chairman Charlie Munger have OK'd the repurchase of more than $63 billion of Berkshire Hathaway common stock. That's more than Berkshire has spent buying shares of Apple and Chevron combined since the beginning of 2016.
One reason Buffett is such a proponent of share buybacks is that it increases the ownership stake of investors without them having to lift a finger. If the outstanding share count is reduced, each remaining share held by investors becomes that much scarcer (and potentially valuable).
Another reason to complete share repurchases is to make a company more fundamentally attractive to investors. A company like Berkshire Hathaway that offers steady or growing net income -- not factoring in unrealized gains and losses associated with its investments -- and a declining outstanding share count should enjoy an earnings-per-share lift over time.
But this aggressive share buyback is also a clear sign from the Oracle of Omaha that he expects his investment and acquisition strategy to continue paying off -- and that's been the case for 58 years (and counting). Berkshire Hathaway's portfolio is packed with cyclical stocks and close to three dozen dividend-paying companies. In short, it's perfectly positioned to benefit from lengthy bull markets.
