What does Warren Buffett really, really like to see in a stock? We could read all of his annual letters to Berkshire Hathaway (BRK.A 0.72%) (BRK.B 0.51%) shareholders to find out. We could also go back to the many interviews the legendary investor has given through the years.
But perhaps the best approach is to examine what Buffett has done instead of what he's said. How? Check out the stocks that are actually in Berkshire's portfolio. Roughly $248 billion of Buffett's $354 billion portfolio is invested in seven stocks that check off one important box.
Cash flow is king
Let's first address the important common denominator for the seven stocks. You've probably heard the adage, "Cash is king." I suspect that Buffett would tweak the expression to say, "Cash flow is king." In particular, free cash flow ranks as a critical metric for evaluating a stock.
Buffett prefers to use the term "owner's earnings" for what many investors call free cash flow. That's a good way of thinking about the financial metric. It measures the cash left over after a company pays all of its operating costs and makes any capital expenditures. In other words, free cash flow basically is the earnings that the company's owners (for a public company, its shareholders) ultimately have available.
Free cash flow can be used to invest in growing the business. It can be used to pay dividends. It can also be used in stock buybacks, which boost the value of existing shares.
Buffett's "Magnificent Seven"
Buffett once stated, "We are trying to look at businesses in terms of what kind of cash can they produce if we're buying all of them, or will they produce, if we're buying part of them." The Oracle of Omaha definitely appears to put Berkshire's money where his mouth is. The table below shows the seven stocks in Berkshire's portfolio that generate a massive amount of free cash flow.
| Stock | Free Cash Flow | Value of Berkshire Stake |
|---|---|---|
| Apple (AAPL 2.20%) | $99.6 billion | $173.5 billion |
| Bank of America (BAC -0.19%) | $43.3 billion | $30.2 billion |
| American Express (AXP 0.45%) | $18.6 billion | $24.0 billion |
| Chevron (CVX 0.69%) | $20.4 billion | $15.6 billion |
| Visa (V 0.11%) | $19.7 billion | $2.1 billion |
| Amazon (AMZN 3.20%) | $16.9 billion | $1.4 billion |
| Capital One Financial (COF 0.12%) | $20.6 billion | $1.3 billion |
| Total | $248.4 billion | |
Data sources: YCharts, CNBC. Values of Berkshire stakes as of Nov. 16, 2023.
Apple is obviously the 800-pound gorilla in Berkshire's portfolio. Not so coincidentally, the tech giant also ranks as the biggest free cash flow machine among the conglomerate's holdings. Apple's iPhone ecosystem continues to churn out cash quarter after quarter.
Winners all around
It's not surprising that all seven of these Buffett stocks have been huge winners over the long term. Most have delivered impressive gains over the last decade.
Granted, some of them have experienced challenges at times. Bank of America has been negatively impacted by the banking crisis this year. Chevron's fortunes ebb and flow with oil and gas price swings.
However, the strong free cash flow generated by these stocks reflects their solid underlying businesses. Several of them claim exceptional economic boats (Apple, Amazon, and Visa especially stand out on this front).
Investors looking for great long-term stocks to buy should be able to find excellent ideas from Buffett's "Magnificent Seven." Companies like Apple, Bank of America, American Express, Chevron, Visa, Amazon, and Capital One are likely to continue delivering growth and rewarding shareholders through dividends and/or stock buybacks for years to come.
