For nearly six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been dazzling Wall Street with outsize gains. He's overseen a nearly 20% annualized return in his company's Class A shares (BRK.A) since taking the reins in 1965, which is roughly double the total return of the benchmark S&P 500 (on an annualized basis), including dividends, over the same period.
What's particularly intriguing about the Oracle of Omaha's formula for success is that it doesn't involve any fancy software or tools that aren't available to everyday investors. Rather, Buffett chooses to put his money to work in brand-name companies with strong management teams, and he frequently leans on time as an ally.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But what investors might not realize about Buffett is that he also strongly favors portfolio concentration. When he and his investment lieutenants, Ted Weschler and Todd Combs, find a stock or sector they believe will outperform over the long run, they aren't shy about putting a significant percentage of Berkshire's invested assets to work within a narrow focus.
As of the closing bell on Sept. 15, approximately 88% ($311.6 billion) of Berkshire Hathaway's $352 billion portfolio was invested in stocks housed in just four sectors of the market.
Information technology: 47.28% of invested assets ($166.6 billion)
Believe it or not, technology is the sector the Oracle of Omaha has piled nearly half of Berkshire Hathaway's invested assets into. But this figure does come with a bit of asterisk. Although Berkshire owns six tech stocks totaling $166.6 billion in market value, Apple (AAPL -0.35%) comprises a little over $160 billion of invested assets.
During Berkshire Hathaway's annual shareholder meeting in May 2023, Buffett referred to Apple as "a better business than any we own." It's an incredibly strong statement considering that Berkshire also owns leading railroad BNSF and highly successful insurer GEICO.
Warren Buffett's justification for having north of $160 billion invested in Apple has to do with its innovation, and of course, its capital return program.
The Oracle of Omaha is fully aware of the loyalty consumers have to Apple's physical products and subscription services. Apple's iPhone has accounted for around half of U.S. smartphone market share since introducing a 5G-capable version in late 2020. The company is also delivering steady growth from its subscription services segment.
Furthermore, Apple has repurchased around $600 billion worth of its common stock since kicking off its buyback program in 2013. Buffett has always favored companies that increase Berkshire's ownership stake through regular share repurchases.
Financials: 20.91% of invested assets ($73.7 billion)
The second-largest sector in Berkshire Hathaway's $352 billion portfolio is financials. Financial stocks are where the Oracle of Omaha feels most comfortable putting his company's cash to work, as evidenced by the $73.7 billion currently invested across 14 securities (12 stocks and two exchange-traded funds).
The reason Buffett loves financials has to do with his long-standing belief to never bet against America. Even though he understands that economic downturns and stock market corrections are inevitable, Buffett is keenly aware that recessions and stock market downturns are both short lived. He's angled Berkshire Hathaway's portfolio to take advantage of the natural expansion of the U.S. economy over the long run by owning an assortment of high-quality, cyclical financial stocks.
Among Berkshire's bevy of financial stocks, three big players stand out: bank stock Bank of America (BAC -0.21%), credit services provider American Express (AXP -0.62%), and credit ratings agency Moody's (MCO 0.25%). Collectively, these three companies account for $63 billion of the $73.7 billion invested in financial stocks.
They're also businesses with well-defined competitive advantages and/or catalysts:
- Bank of America is the most interest-sensitive of the big banks. With the Federal Reserve undertaking its most aggressive rate hiking cycle in four decades, no money-center bank has reaped the rewards of added net interest income more than BofA.
- American Express gets to play both sides of the transaction aisle. It charges merchants to process transactions while also acting as a lender to consumers. To boot, it's done a phenomenal job of attracting high-earning cardholders.
- Moody's saw its credit-rating division thrive during the low-interest rate environment, and can now lean on its analytics division to help businesses navigate an uncertain environment and remain compliant with local and national laws.
Consumer staples: 10.36% of invested assets ($36.5 billion)
The third sector of prominence in Buffett's $352 billion portfolio is consumer staples.
Buffett is a big fan of businesses that generate recurring or highly predictable revenue by selling essential products. No matter how well or poorly the U.S. economy performs, consumers still need to eat, drink, purchase household cleaning supplies, and so on. This is why Berkshire Hathaway has $36.5 billion invested across six consumer staples stocks.
Yet among these six consumer staples holdings, two are considerably larger than the rest: beverage giant Coca-Cola (KO) and consumer-packaged foods company Kraft Heinz (KHC -0.55%). Collectively, Coca-Cola and Kraft Heinz account for $34.1 billion of the $36.5 billion invested in this sector.
Coca-Cola is Buffett's longest-tenured holding (since 1988). While it doesn't offer the same growth rate it once did, Coke still has needle-moving catalysts and competitive advantages in its corner. For instance, it has virtually unsurpassed geographic diversity. Coke operates in all but three countries worldwide (Cuba, North Korea, and Russia), which allows it to generate predictable cash flow in developed countries, while ramping up its organic growth potential in developing/emerging markets.
Meanwhile, Kraft Heinz is a bit of an eyesore for the Oracle of Omaha. In hindsight, Buffett admits to overvaluing the company's long list of brands. While Kraft Heinz is providing Berkshire Hathaway with roughly $521 million in annual dividend income, its balance sheet is bogged down by significant long-term debt and goodwill. With minimal financial flexibility, reigniting volume-based growth in Kraft Heinz's brands could prove challenging.
Image source: Getty Images.
Energy: 9.9% of invested assets ($34.8 billion)
The fourth and final sector that Buffett and his investing lieutenants have absolutely piled into is energy. Despite not accounting for more than 9% of invested assets at any point between the start of 2001 and end of 2021, energy has represented more than 9% of Berkshire's portfolio over the past six quarters.
What's noteworthy about Berkshire's energy investments is that only two companies comprise the $34.8 billion of invested assets: Chevron (CVX 0.37%) and Occidental Petroleum (OXY -0.15%). Note, this doesn't include the $10 billion in Occidental Petroleum preferred stock yielding 8% annually that Berkshire also holds.
Both Chevron and Occidental Petroleum are integrated energy companies. They generate revenue by drilling for oil and natural gas, but are also hedged, to some extent, via transmission pipelines (Chevron), refineries (Chevron), and/or chemical plants (Chevron and Occidental). But there are two pretty big differences between these two companies.
To start with, Occidental generates a disproportionately large percentage of its revenue from drilling, compared to its downstream segments. On the other hand, Chevron's revenue channels are far more balanced. This means Occidental's operating cash flow is far more sensitive to spot-price movements in crude oil than Chevron.
There's also a pretty big difference between Chevron's and Occidental's balance sheets. Whereas Chevron has an exceptionally low net debt ratio of 7% for an integrated oil and gas operator, Occidental Petroleum is still trying to dig its way out of a sizable debt hole caused by its acquisition of Anadarko Petroleum in 2019. In other words, Chevron has superior financial flexibility when compared to Occidental.
