When it comes to investing greats, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett is in a class of his own. Since taking over in 1965, he's overseen a greater than 4,100,000% return in his company's Class A shares (BRK.A). For the sake of comparison, the broad-based S&P 500 has yet to achieve a 30,000% total return, including dividends, in the 58 years the Oracle of Omaha has been CEO.
Riding Buffett's coattails to sizable gains has been a strategy used by professional and everyday investors for decades. Thanks to required quarterly 13F filings from Berkshire Hathaway, mirroring the Oracle of Omaha's trading activity is relatively easy.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But what you might not realize is that Berkshire Hathaway's 13Fs fail to tell the full story.
In 1998, Buffett's company acquired reinsurance giant General Re for $22 billion. Though the reinsurance operations were the crown jewel of this buyout, General Re also owned specialty investment company New England Asset Management (NEAM). When Berkshire bought General Re, NEAM was part of the deal.
As of June 2023, New England Asset Management was overseeing approximately $690 million in invested assets. While this pales in comparison to the $333 billion portfolio the Oracle of Omaha oversees, it nevertheless means that anything NEAM owns is, ultimately, part of Berkshire Hathaway. In other words, New England Asset Management is Warren Buffett's secret portfolio.
Based on the latest round of 13F filings, Buffett's secret portfolio has been buying shares of three historically cheap, brand-name stocks.
Coca-Cola
The first inexpensive stock Buffett's secret portfolio is buying is a company that likely rings a bell with Buffett enthusiasts: Coca-Cola (KO). The beverage giant is Berkshire Hathaway's longest continuous holding (35 years).
NEAM's quarterly 13F shows that Buffett's hidden portfolio added 36,450 shares of Coca-Cola in the June-ended quarter. This increased the fund's stake by 80% from where things stood at the end of March.
Shares of the company have been sinking at a rapid pace in recent weeks as concerns grow over the rise of glucagon-like peptide-1 (GLP-1) drugs. Novo Nordisk has a trio of approved GLP-1 receptor agonists that have helped users lose weight. The thought process being that if GLP-1 drugs become increasingly popular, demand for soft drinks and snacks could taper.
Personally, I find the above thinking to be a bit of a reach. Coca-Cola has navigated economic downturns and changing health trends before and come out stronger every time.
The reason Coca-Cola is such a phenomenal business is its geographic reach and brand value. Coke has 26 brands generating at least $1 billion in annual sales, and it has ongoing operations in all but three countries (North Korea, Cuba, and Russia). A diverse operating model ensures highly predictable cash flow in any economic climate.
Meanwhile, Kantar's "Brand Footprint" report finds that no company has had their products plucked from store shelves more frequently than Coca-Cola over the past 10 years. It's a company with exceptional brand recognition and strong pricing power.
Coca-Cola is also cheap. The company's forward price-to-earnings (P/E) ratio of 19 represents a low-water mark since 2013.
U.S. Bancorp
A second historically cheap stock Warren Buffett's secret portfolio has been buying is U.S. Bancorp (USB 0.32%), the parent of the more-familiar U.S. Bank.
Though U.S. Bancorp had been a longtime holding in Berkshire Hathaway's portfolio, it was jettisoned in its entirety during the first quarter of this year. But in Buffett's secret portfolio, 21,900 shares of U.S. Bancorp were purchased in the June-ended quarter, representing an 11% increase from the first quarter.
The biggest knock against U.S. Bancorp, and the banking industry as a whole, is the growing likelihood that a U.S. recession could take shape in the coming quarters. With interest rates shooting higher over the past 18 months, credit delinquencies and loan losses could increase for bank stocks.
But there are two sides to this coin. For one, periods of expansion last disproportionately longer than recessions. Only three of 12 U.S. recessions following World War II have lasted longer than a year, and none of the remaining three surpassed 18 months. Comparatively, most expansions have endured for more than a year. Cyclical bank stocks benefit from long-winded periods of growth.
The reward of high interest rates also outweighs the risks for bank stocks. Even though higher lending rates could increase credit delinquencies and loan losses, U.S. Bancorp will collect higher interest income on outstanding variable-rate loans.
Another clear-cut advantage for U.S. Bancorp is its digital presence. When the company last provided an update in August 2022, 82% of its active customers were banking digitally, with more than 3 out of 5 loans completed online or via mobile app. Digital banking is considerably more cost-effective for banks than in-person interactions, which should ultimately help improve U.S. Bancorp's operating efficiency.
A forward P/E ratio of less than 8 is a dirt cheap price to pay for a regional bank with a history of superior return on assets.
Image source: Getty Images.
Johnson & Johnson
The third historically cheap stock Warren Buffett's $690 million secret portfolio has been busy buying is healthcare giant Johnson & Johnson (JNJ -0.46%), which is perhaps best-known as "J&J." During the June-ended quarter, NEAM purchased 6,400 shares of J&J, which increased its existing stake by nearly 18%.
The issue weighing on Johnson & Johnson's stock at the moment is the litigation it's contending with concerning its now-discontinued talcum-based baby powder. The company is facing in the neighborhood of 100,000 lawsuits that allege its baby powder causes cancer. Though J&J has tried to settle these claims for as much as $8.9 billion, its two previous efforts were tossed out in court.
While the uncertainty of Johnson & Johnson's potential financial liability from its talcum-based baby powder is less than ideal, it's important to recognize how rock-solid the company's balance sheet is. J&J has more than $28 billion in cash and cash equivalents, and it's one of only two publicly traded companies to carry a coveted AAA credit rating from Standard & Poor's (S&P), a division of S&P Global. This credit rating from S&P signals it has more faith in J&J servicing and repaying its outstanding debts than it does of the U.S. government (AA-rated) doing the same.
The beauty of healthcare stocks like Johnson & Johnson is that demand for their products is relatively inelastic. Regardless of how the economy performs, people will still develop ailments that require prescription medicine and medical devices. This highly predictable cash flow is what helped J&J grow its adjusted operating earnings for 35 consecutive years, through 2018.
Johnson & Johnson is also benefiting from its continued push toward pharmaceuticals. Even though novel drugs have a finite period of sales exclusivity, the margins and growth potential with pharmaceuticals are many multiples greater than medical devices. With J&J aggressively investing in internal research and collaborations, it shouldn't have much trouble avoiding patent cliffs and sustaining a mid-to-high single-digit growth rate.
As I stated last week, leadership continuity is important. J&J has had just a handful of CEOs since it was founded in 1886. A lack of a carousel in key leadership positions ensures that growth strategies are being properly implemented.
And, of course, Johnson & Johnson is inexpensive. The company's forward P/E ratio of 14 is its cheapest forward valuation in at least a decade.
