Billionaire investor Warren Buffett knows how to pick winners in the stock market. And there's no big secret about the types of companies he likes to invest in. He values consistency, profitability, and companies whose futures remain bright.
The top five holdings in Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) stock portfolio today are Apple (AAPL -0.35%), Bank of America (BAC -0.21%), American Express (AXP -0.62%), Coca-Cola (KO), and Chevron (CVX 0.37%). All five of these stocks have the following three things in common:
1. They all generate profit margins in excess of 10%
Warren Buffett is a value investor at heart, and one thing that's always going to be crucial to him is a company's prospects for profitability. All five of these businesses should be able to consistently report profits. Over the past year, their margins have all been comfortably above 10%.
AAPL Profit Margin (Quarterly) data by YCharts.
These margins can and will fluctuate, however. Chevron and other oil and natural gas companies have struggled at times in the past due to low oil prices -- and the price of crude even briefly turned negative during the early stages of the pandemic. But that was an anomaly. Under normal conditions, Chevron runs a business that should be profitable.
Bank of America offers the highest margin of these five businesses, but it, too, could struggle if a recession occurs and there is a slowdown in economic activity. It isn't immune to the effects of a downturn.
Downturns can impact any business, but the key takeaway here is that in the long run and over the course of regular operating activities, investors should expect these businesses to post profits. That is a key criterion Buffett uses when selecting stocks.
2. They all have strong brands
Another feature that's common to all these companies is that they have strong brands that consumers are familiar with.
- Apple: The iPad and iPhone maker is able to command premium prices for its devices and services due to the strong brand loyalty it engenders. In recent years, Apple hasn't made remarkably radical improvements to its devices. Its updates often include adding cameras or making modest design changes, and yet, sales for iPhones remain strong -- they came in at over $200 billion in the company's most recent fiscal year (which ended in September). That was comparable to the $205 billion Apple reported in the prior year -- not bad, given the overall macroeconomic environment.
- Bank of America: This is one of the largest banks in the country, trailing only JPMorgan Chase in assets. It has long been a popular option for consumers, reporting growth in consumer checking accounts for 19 consecutive quarters. On the small business side, its growth streak sits at 35 consecutive quarters.
- American Express: American Express caters to more of an affluent customer base, and that may be a reason it is the credit card company in Berkshire's top five holdings, rather than Visa or Mastercard. Amex is coming off a third quarter during which it produced record earnings per share ($3.30 in its latest quarter). That also marked the sixth straight quarter during which its revenue hit a record. Demand for its cards remains resilient.
- Coca-Cola: The iconic soft drink company is known all over the world. There aren't many brands that are stronger than Coca-Cola, if there are any at all. And that brand power allowed the company to raise prices this year without putting a big dent into demand. Things are going so well for the business that Coca-Cola recently raised its guidance for both its top and bottom lines.
- Chevron: The mammoth oil and natural gas company has over 8,000 Texaco- and Chevron-branded retail gas stations in the country. It's not hard for consumers to find its gas stations. And while price may be the main reason people pick a gas station, there's some brand loyalty here too. Within six months of launching its Chevron Texaco Rewards program, there were 1 million people using it.
3. All five pay dividends and increase them
Buffett loves dividends. Receiving recurring income is an excellent way for investors to pad their overall gains from an investment. While some of these stocks have relatively low yields at the moment, it's likely all five were purchased by Berkshire at times when their yields were above average. Getting above-average yields isn't too hard when the S&P 500 average is 1.6%.
All of these companies have also been relatively consistent in increasing their payouts in recent years:
AAPL Dividend data by YCharts.
It's OK to be a little greedy when it comes to dividends, as long as the underlying businesses are sound. And growing payouts can help offset the effects of inflation.
Investors can apply similar logic when picking stocks
Picking stocks can be as simple or complicated as investors want the process to be. For long-term value investors, it doesn't need to be difficult. Finding businesses that are profitable and pay dividends can be achieved by using a stock screener. There is a bit of judgment involved in assessing the strength of a brand, however. But consumers can gauge the strength of that, too, by assessing how popular a business is and how devoted and loyal its customers are.
Berkshire Hathaway's top five stock portfolio holdings should serve as a reminder that investors don't need to go to great lengths searching for the next big stock. Sometimes, some of the best investments are right out there in plain view.
