For decades, Warren Buffett's Berkshire Hathaway has outperformed the S&P 500, and it hasn't been by being overly aggressive or by chasing the latest growth stock. Instead, his strategy has been much simpler -- essentially, finding quality businesses with strong financials and growth prospects.
And there's one more ingredient, too. While Berkshire holds many stocks, only a handful of investments account for the bulk of the portfolio. In his latest letter to shareholders, Buffett said, "It just takes a few winners to work wonders." Investors should take heed of that advice and do the same: load up on the stocks they feel strongly about and have a smaller position in others, for the sake of diversification.
Two stocks that investors should consider as potential pillars to build around now are Alphabet (GOOG 1.25%) and UnitedHealth Group (UNH -1.03%). Although they aren't in Berkshire's portfolio, they are Buffett-type stocks.
1. Alphabet
Alphabet is a strong business to invest in as it owns both YouTube, the most popular video-sharing website in the world, and Google, which has become synonymous with an internet search. If not for Alphabet's soaring valuation, the stock would likely be in Berkshire's portfolio today.
Buffett and longtime partner Charlie Munger both admit they made a mistake in not buying shares of Google in the past. Munger previously stated that "we could see in our own operations how well that Google advertising was working" and admitted that "we just sat there sucking our thumbs."
The company has achieved considerable growth over the years, with both its top and bottom lines showing significant improvements, even with a bit of a slowdown in the past year:
GOOG Net Income (Quarterly) data by YCharts
What's even more impressive is that in each of the past two years, Alphabet has generated more than $60 billion in free cash flow. The company has the funds to afford to take on risks and invest in new ventures that can pay off. A recent example is its artificial intelligence chatbot, Bard. Right now, it looks to be playing second fiddle to the more popular ChatGPT, but it could become better as Alphabet invests more money into its development.
At around 22 times earnings, the tech stock provides investors with some good value, and there's likely still plenty of upside ahead.
2. UnitedHealth Group
UnitedHealth Group is another stock that investors can build their portfolios around. It may not be as exciting as Alphabet, but it can offer some valuable diversification. The health insurer has a large, safe business that should provide stability.
Last year, while the S&P 500 was falling 19%, the healthcare stock was up over 5%. The stock also pays a dividend that yields 1.4%. While that's not high, there's a big incentive to holding on to it as UnitedHealth Group has been raising its payouts over the years.
While there were fluctuations due to the pandemic, the company's profit margin has normally averaged around 14%.
UNH Profit Margin (Quarterly) data by YCharts
UnitedHealth Group has been using its profits to reinvest in its operations, closing on a deal to acquire software company Change Healthcare last year. And last month, UnitedHealth also completed its acquisition of home health company LHC Group.
With its deep pockets, UnitedHealth looks to be a safe bet to continue acquiring businesses and diversifying its operations. For investors, that could help make UnitedHealth a better buy and lead to strong returns in the future.
Between UnitedHealth and Alphabet, investors have two solid stocks that they can build their portfolios around for the long haul.
