Warren Buffett-led Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.83%) has produced outsized gains over the course of its nearly 60-year history. 2022 marked Berkshire's best year relative to the stock market since 2007 -- which cast a spotlight on the Oracle of Omaha's investing strategies.
Buffett and his team don't try to beat the stock market in a given quarter or year. Rather, they focus on investing in quality businesses that have the industry leadership, management, and business strategy that can be sustained for decades to come. Top Buffett stocks tend to be companies that are very good at making money and navigating challenges, which tend to perform better during a period of slowing economic growth.
Here's why United Parcel Service (UPS -1.35%), Chevron (CVX -0.83%), and Apple (AAPL -1.92%) are three Buffett stocks worth considering now.
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UPS has the makings of a long-term holding
Daniel Foelber (UPS): This week, UPS stock suffered its largest single-session drop in over three years after the package delivery company posted weaker-than-expected first-quarter 2023 results and revised its guidance.
UPS is now forecasting 2023 revenue of just $97 billion, an adjusted operating margin of 12.8%, and dividend payments of $5.4 billion. The forecast would mark an end to UPS' torrid revenue-growth rate and margin expansion, which included 2022 revenue above $100 billion and an operating margin above 13% -- both 10-year highs.
UPS Revenue (Annual) data by YCharts.
Dividend payments of $5.4 billion would be an all-time high for UPS and indicates the company values returning capital to shareholders. But a small dividend raise is too thin of a silver lining to combat the storm clouds on the horizon. "Over the first quarter of 2023, the global volume environment deteriorated due to challenging macro conditions and changes in consumer behavior," said UPS in its Q1 2023 earnings press release. "As a result, UPS expects full-year revenue and adjusted operating margin to be at the low end of its previously guided range."
Despite its short-term challenges, UPS has the makings of a long-term core holding. Buffett and his team have long stressed the importance of a good management team. And UPS has this in spades. CEO Carol Tomé has the qualities that make a great leader. She focuses on the long-term growth drivers of UPS without losing sight of the company's present performance. She also owns up to mistakes or challenges and holds her ground on earnings calls.
Probably Tomé's greatest achievement since taking over as CEO in March 2022 has been her focus on growing margins instead of revenue. In practice, that means focusing less on package-delivery volume and more on partnering with a variety of customers that require higher-margin services. UPS makes far more money on international deliveries, healthcare, big business customers, and small and medium-sized business than it does on residential deliveries. Differentiating itself in these categories instead of eking out a slight advantage over competitors on residential deliveries has proven to be the right direction for UPS.
Despite the stock's sell-off, UPS remains a long-term value due to its market position, strong leadership, and 3.7% forward dividend yield.
Apple has multiple growth opportunities
Lee Samaha (Apple): Warren Buffett is known for buying stocks with strong market positions, generating excellent cash flows, and with an opportunity to improve their return on assets. On all three counts, Apple fits the bill, and Buffett agrees because the consumer electronics company is Berkshire Hathaway's largest holding, representing around 40% of its holdings.
Apple has a nearly 57% share in the U.S. smartphone market and is also the largest player worldwide with a nearly 28% share of the worldwide smartphone market. It's a market position in an industry trending toward consolidation; Samsung and Xiaomi are the only other players with above 10% worldwide market share.
Meanwhile, Apple does a great job of converting revenue into free cash flow (FCF). Typically, more than a quarter of its revenue drops into FCF. Finally, the smartphone market is increasingly moving toward more value embedded in the services offerings -- another reason the significant players will continue to dominate.
Apple generates almost 20% of its revenue from services, but services are growing faster than product sales and comes with gross profit margins nearly double that of its product revenue.
As such, Apple's overall revenue could stand still, but provided that services grow faster than product growth, Apple should still improve profitability and return on assets.
It all adds up to make the electronics giant a top stock for investors looking to run offense out of Buffett's playbook.
Power your passive income with Chevron
Scott Levine (Chevron): Investing in the stock market can be scary. When volatility emerges, it can quickly rattle investors' nerves. But experienced investors know that having the resilience to withstand downturns is table stakes for building long-term wealth. Following the lead of successful investors, like Warren Buffett, can help steady the nerves of anxious investors, especially when picking up shares of dividend powerhouses like Chevron, which offers a forward yield of 3.5%.
An oil supermajor, Chevron occupies a prominent place -- the stake is valued at about $28.6 billion -- in Warren Buffett's portfolio. The Oracle of Omaha first bought Chevron's stock in the fourth quarter of 2020, and it now represents about 8.2% of the portfolio.
Buffett's enthusiasm for Chevron's stocks is unsurprising as it's one of the premier dividend opportunities among energy stocks. The stock has a distinguished history of raising its dividend in each of the past 36 years, and it's likely that it will continue to do so in the years to come. Management has articulated a dividend policy that includes raising the dividend over the next five years as long as the price of Brent Crude per barrel -- a benchmark oil price -- averages more than $50.
Valued at about 10.9 times forward earnings, shares of Chevron are currently sitting in the bargain bin considering the stock's five-year average forward-earnings multiple is 37.5. Unconvinced that the stock's price is attractive right now? Consider its price tag from a cash-flow perspective. Shares are changing hands today at about 6.7 times operating cash flow, representing a discount to their five-year average cash-flow multiple of 9.4.
