There aren't many people that can captivate the attention of new and tenured investors quite like Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) CEO Warren Buffett. The company's annual shareholder meeting, which drew a crowd of a few dozen people in 1973, now regularly features a packed house of more than 30,000 shareholders and investors annually.
The reason investors flock to Omaha, Nebraska, is to hear one of Wall Street's most successful investors spill the beans on what he thinks about the U.S. economy and certain stocks over the long run. Since taking over as CEO of Berkshire in 1965, he's doubled up the average annualized total return, including dividends paid, of the broad-based S&P 500 (19.8% vs. 9.9%).
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Books can be, and have been, written about Warren Buffett's not-so-secret formula for success. But if there's one factor that doesn't get nearly enough credit, it's his penchant for portfolio concentration. Buffett has long-believed that diversification is only something investors should seek if they don't know what they're doing.
Based on the latest Form 13F filing with the Securities and Exchange Commission, a whopping 93% of Warren Buffett's $334 billion investment portfolio at Berkshire Hathaway was invested in only four sectors.
1. Technology: $166.7 billion (49.9% of invested assets)
Although Berkshire Hathaway has stakes in six separate tech stocks, there's one that stands head and shoulders above its peers: Apple (AAPL -0.57%). As of the closing bell on May 24, 2023, Apple accounted for $157.3 billion of the $166.7 billion in invested assets from the tech sector.
According to Warren Buffett, Apple is a "better business than any we own." It's not a statement that's made lightly, and it's backed up in many respects. Apple is pretty consistently the most-valuable brand in the world, and it has the loyal customer base to prove it.
More importantly, Apple is an innovation kingpin. Everything from the company's revolutionary iPhone to its tried-and-true Mac personal computers have endeared consumers to the brand. Further, the company is in the process of shifting its focus to subscription services. A subscription-driven future should lead to a higher operating margin and less in the way of revenue fluctuations when physical product replacement cycles come around.
Another interesting tech "investment" you'll see in Buffett's portfolio is gaming company Activision Blizzard (ATVI). Though Buffett is known for his long-term mindset, he and his investing lieutenants, Ted Weschler and Todd Combs, have made clear that this $3.8 billion position is strictly for arbitrage purposes. Activision has agreed to be acquired by Microsoft for $95/share in an all-cash offer. If regulators green-light the Activision deal, Buffett's company stands to make a tidy gain.
2. Financial: $69.8 billion (20.9% of invested assets)
Even though financial stocks aren't remotely close to technology in terms of weighting, the aggregate number of holdings in Berkshire's portfolio from the financial sector demonstrates how comfortable the Oracle of Omaha is in putting money to work in bank, credit-service, and insurance stocks.
Among the more than one dozen financials held by Buffett's port, the big three account for the lion's share of this $69.8 billion of invested assets. This includes Bank of America (BAC 1.53%), American Express (AXP -0.08%), and Moody's (MCO -0.22%).
Bank of America is Berkshire's second-largest holding by market value, and it's benefiting nicely from the rapid increase in interest rates. BofA's interest rate sensitivity is higher than all other domestic money-center banks, which means each rate increase is leading to billions of dollars in added net interest income each quarter.
American Express, a 30-year (and counting) holding for Buffett's company, is one of the top payment processors in the U.S., and it has a knack for attracting high-income consumers. High-earning consumers are less likely to alter their spending habits because of rising inflation or modest economic weakness. This sets AmEx up for success in virtually any economic environment.
Meanwhile, credit-rating agency Moody's has been one of Buffett's best investments of all-time. More than a decade of historically low lending rates supported rapid growth in the company's rating segment. With interest rates climbing, Moody's Analytics segment, which focuses on risk assessment and corporate compliance, becomes all the more important.
Image source: Coca-Cola.
3. Consumer staples: $39.6 billion (11.8% of invested assets)
Since the start of the century, consumer staples stocks have made up a steadily smaller percentage of Berkshire Hathaway's portfolio. With the exception of the fourth quarter of 2021, this 11.8% weighting spanning six stocks represents a near low-point for consumer staples importance to Buffett's company.
Nevertheless, consumer staples stocks present Buffett and his team with something they'll struggle to find with most other sectors: cash flow predictability. No matter how well or poorly the stock market or economy perform, certain goods and services are going to be purchased by consumers.
A perfect example, and Berkshire Hathaway's largest consumer staples stock by market value, is Coca-Cola (KO 0.68%). Coca-Cola has an operating presence in all but three countries worldwide, it has 26 brands that are generating at least $1 billion in annual sales, and it's, arguably, the most-recognized consumer goods brand globally. Between its top-notch marketing, strong pricing power, and well-known brands, Coke has little trouble steadily delivering for its shareholders.
Another sizable player in the consumer staples space that Berkshire Hathaway has put big bucks to work in is Kraft Heinz (KHC 0.57%). Kraft has more than a dozen well-known brands that kids and adults are very familiar with, including Jell-O, Velveeta, and Philadelphia, along with Kraft, and Heinz. During the COVID-19 pandemic, Kraft Heinz benefited from consumers staying home and eating its easy-to-prepare meals and snacks.
4. Energy: $33.7 billion (10.1% of invested assets)
The fourth sector that collectively makes up 93% of Berkshire Hathaway's invested assets is energy. But make no mistake about it, almost the entirety of this $33.7 billion of invested assets is tied up in just two stocks: Chevron (CVX 0.75%) and Occidental Petroleum (OXY 0.09%).
Having more than $33 billion invested in oil and gas stocks sends a very clear message that Buffett and his team fully expect the spot price for crude oil (and possibly natural gas) to remain elevated for years. This belief is backed by three years of capital underinvestment stemming from the global pandemic, as well as the ongoing conflict between Russia and Ukraine. As long as the supply chain for crude oil remains constrained, there's the potential for upward pressure on the price spot for West Texas Intermediate and Brent crude.
Chevron and Occidental Petroleum are also integrated energy companies. Although they both generate higher margins from drilling, Chevron operates transmission pipelines, chemical plants, and refineries, while Occidental also has chemical operations. These ancillary assets can help both companies hedge their operating performance in the event that the spot price of crude oil declines. It is worth noting that Occidental generates a higher percentage of its net sales from drilling than Chevron.
However, the biggest difference between these two energy stocks is their balance sheets. Chevron might have the strongest and most-flexible balance sheet among global energy majors. Meanwhile, Occidental Petroleum is still digging it way out of a massive debt hole created by its acquisition of Anadarko in 2019.
