Compared to most investors, Berkshire Hathaway's (BRK.A -0.34%) (BRK.B -0.01%) Warren Buffett is in a class of his own. The billionaire CEO of Berkshire who took over in 1965 has overseen a cumulative gain in his company's Class A shares (BRK.A) of nearly 4,100,000% as of last weekend. Jaw-dropping increases like this tend to get you noticed on Wall Street.
But what's truly interesting about the Oracle of Omaha is his transparency. Buffett is an open book who's willingly shared the traits he looks for in businesses when making sizable investment decisions.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, the one factor that's made Warren Buffett successful which isn't given nearly enough attention is his penchant for portfolio concentration. Both he and right-hand man Charlie Munger believe that diversification is only necessary if you don't know what you're doing. Despite overseeing a nearly $339 billion investment portfolio at Berkshire Hathaway, Warren Buffett has 84% of invested assets tied up in just seven stocks.
1. Apple: $160.4 billion (47.3% of invested assets)
It takes one short look at Berkshire Hathaway's portfolio to realize the Oracle of Omaha willingly invests big bucks into the businesses he values most. Tech stock Apple (AAPL 0.64%) accounting for more than 47% of invested assets, and Buffett and his team adding to Berkshire's position during the first quarter, demonstrates just how highly he thinks of the company.
From brand value to innovation, Apple does it all. According to Interbrand and Kantar BrandZ's ranking, it's the most valuable brand in the world. Apple has an easily recognized brand, a loyal customer base, and is trusted by consumers. The Oracle of Omaha puts a lot of value into businesses that build trust with consumers.
Most importantly, CEO Tim Cook has allowed Apple's innovation to do the talking. The iPhone has been revolutionizing the smartphone market for nearly 16 years, and now Apple's subscription-services segment is rapidly adding new users.
The cherry on top for Apple is that it's repurchased $586 billion worth of its common stock over the past 10 years. That's greater than the market cap of 493 out of 500 S&P 500 companies.
Rapidly rising interest rates have been a boon for Bank of America's net-interest income. Effective Federal Funds Rate data by YCharts.
2. Bank of America: $29 billion (8.6% of invested assets)
Although Apple is viewed as Berkshire Hathaway's best business, there's no sector Warren Buffett is more comfortable investing in than financials. More specifically, he loves dabbling in bank stocks, with Bank of America (BAC 1.70%) being his very clear favorite of the lot.
The simple reason Buffett loves banks is because they're cyclical. Though recessions are inevitable, periods of expansion last considerably longer than downturns. This allows companies like Bank of America (BofA) to expand their loans and deposits (i.e., the bread and butter for banking growth) and grow in lockstep with the U.S. economy.
As I noted earlier this week, BofA's calling card is its sensitivity to interest rates. While the Federal Reserve raising interest rates at the fastest pace in four decades hasn't been pleasant for consumers, it's great news for BofA and the variable-rate loans it has outstanding. BofA is bringing in billions of dollars in added net-interest income each quarter thanks to higher interest rates.
Don't overlook BofA's capital-return program, either. During periods of economic expansion, BofA can comfortably return (with Fed approval) $20 billion to $30 billion annually to its shareholders via dividends and buybacks.
3. Coca-Cola: $25.1 billion (7.4% of invested assets)
The third-largest holding in Warren Buffett's portfolio is Berkshire Hathaway's longest-held stock, Coca-Cola (KO 0.15%). Coke has been a fixture since 1988.
Coca-Cola is another perfect example of a wholesome brand Buffett likes that's built trust with consumers. It's one of the most recognized consumer-staples brands globally and has operations in all but three countries worldwide. Having this sort of geographic diversity, to go along with 26 brands generating at least $1 billion annually, provides the consistency of cash flow that Buffett and his investing lieutenants (Todd Combs and Ted Weschler) have grown to love.
Something else Coca-Cola has is an exceptional marketing team year in and year out. At the moment, Coke is spending more than half of its advertising budget online to connect with a younger audience. But don't overlook its decades of holiday tie-ins and well-known brand ambassadors, which allow the brand to engage consumers of all ages.
Coca-Cola has also increased its base annual dividend for 61 consecutive years, which is an easy way to get on Buffett's good side.
Image source: American Express.
4. American Express: $23.2 billion (6.8% of invested assets)
Credit-services provider American Express (AXP 2.56%) is another long-term holding that's been a marvelous investment for Warren Buffett and his team. AmEx is a continuous holding since 1993, and Berkshire is currently sitting on an unrealized gain (not including dividends) of about 1,700%.
American Express's secret sauce is what I like to call its ability to "double dip." It's the No. 3 payment processor in the U.S. by credit card network-purchase volume, which allows it to generate merchant fees, and benefit as the U.S. and global economy expand. However, it also acts as a lender, which helps the company generate interest income and annual cardholder fees.
Furthermore, American Express is adept at attracting well-to-do clients. Consumers with higher incomes are less likely to change their spending habits when inflation rises or the U.S. economy hits a speed bump. Targeting high earners means fewer disruptions to its cash flow.
Since Berkshire's cost basis on AmEx is just $8.49 per share, its $2.40 annual dividend payout equates to a 28% yield relative to cost.
5. Chevron: $20.6 billion (6.1% of invested assets)
Despite trimming its position in this company by more than 30 million shares during Q1, Berkshire Hathaway's fifth-biggest holding is energy stock Chevron (CVX 0.57%).
The only reason Buffett, Combs, and Weschler would collectively agree to put more than $20 billion to work in an integrated oil and gas company is if they believe the value of energy commodities will remain elevated. Certain macroeconomic factors do suggest crude oil prices could be sticky at high levels. For instance, Russia's invasion of Ukraine, coupled with three years of capital underinvestment by energy majors during the COVID-19 pandemic, should restrict the supply of oil for years to come.
On the flipside, Chevron is an integrated energy company, which is a fancy way of saying it's hedged its operating performance in the event that crude oil and natural gas prices sink. In addition to drilling, Chevron operates transmission pipelines, chemical plants, and refineries. The latter two tend to enjoy lower input costs and higher demand when crude prices dip.
To keep with the theme, Chevron is big on returning capital to its shareholders. It's increased its base annual payout for 36 years in a row, and its board recently approved a $75 billion share-repurchase program.
A historically high spot price for crude oil has helped Occidental Petroleum pay down some of its debt. WTI Crude Oil Spot Price data by YCharts.
6. Occidental Petroleum: $12.9 billion (3.8% of invested assets)
Another energy stock the Oracle of Omaha and his team can't stop buying of late is Occidental Petroleum (OXY 0.58%). Berkshire Hathaway was given the OK from the Federal Energy Regulatory Commission in August to acquire up to a roughly 50% stake in Occidental should it choose to do so.
The investment thesis for Occidental Petroleum somewhat mirrors Chevron in that higher oil prices are favorable, and both are integrated energy operators. However, there are two key differences. The first is that Occidental is far more reliant on its drilling segment as a percentage of net sales. If oil prices rise or fall, Occidental would be expected to see bigger swings in its operating cash flow and probably its share price.
The other big difference can be seen on its balance sheet. Whereas Chevron has one of the lowest net-debt ratios in the oil and gas industry, Occidental Petroleum closed out March 2023 with $19.6 billion in net debt. Even though that's down considerably from two years prior, it's still a sizable hole the company needs to dig itself out of.
I'd be remiss if I didn't also note that Berkshire Hathaway holds $10 billion worth of Occidental preferred stock that yields 8% annually.
7. Kraft Heinz: $12.7 billion (3.8% of invested assets)
The seventh and final company that collectively adds up to 84% of Warren Buffett's investment portfolio at Berkshire Hathaway is consumer-packaged goods company Kraft Heinz (KHC -0.21%).
The lure for Kraft Heinz is the company's vast portfolio of well-known, easy-to-prepare meals, snacks, and condiments, such as Oscar Mayer, Velveeta, Kool-Aid, Jell-O, and of course, Grey Poupon. Companies with strong branding typically have the ability to generate predictable cash flow and pay a handsome dividend -- a 4.1% annual yield in Kraft Heinz's case.
Kraft Heinz was in the minority in that it benefited from the COVID-19 pandemic. With people staying home during the pandemic, easy-to-make meals and snacks flew off grocery-store shelves.
But this organic sales boost has its limits. Despite having significant pricing power, Kraft Heinz's volume/mix has declined in successive quarters from the prior-year period. This looks to be a signal that consumers are trading down to cheaper brands, which could mean trouble for Kraft Heinz in the coming quarters.
