For the better part of six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been running circles around Wall Street. With the help of his investment team, which includes the late, great Charlie Munger, Buffett has overseen a nearly 20% annualized return since the mid-1960s in Berkshire's Class A shares (BRK.A). That's double the annualized total return of the benchmark S&P 500, including dividends, over the same stretch.
Riding the Oracle of Omaha's coattails has been a no-brainer moneymaking strategy, which is why investors eagerly await Berkshire's Form 13F filings with the Securities and Exchange Commission. A 13F provides a detailed snapshot of what Wall Street's smartest and most-successful money managers bought and sold in the latest quarter.
The interesting thing about Berkshire Hathaway is its 13Fs don't tell the complete story.
In 1998, Buffett's company acquired General Re for $22 billion. While the purpose of this transaction was to add General Re's reinsurance operations to the mix, General Re also owned a specialty investment firm known as New England Asset Management (NEAM). When Berkshire closed its acquisition of General Re, it became the owner of NEAM.
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As of Sept. 30, 2023, New England Asset Management had nearly $610 million in invested assets, and is therefore required to file a quarterly 13F. Though Buffett doesn't oversee NEAM's invested assets, what NEAM owns is ultimately part of Berkshire Hathaway. Put another way, New England Asset Management is Warren Buffett's "secret" portfolio.
This secret portfolio closed out the third quarter with 111 holdings. Five of these phenomenal stocks stand out as screaming buys for 2024.
AT&T
The first amazing stock to buy in Warren Buffett's hidden portfolio for the upcoming year is telecom company AT&T (T 1.02%). Although AT&T's shares hit a three-decade low earlier this year on concerns about lead-sheathed cables still in use, this worry appears to be much ado about nothing.
The important consideration for investors is that 5G download speeds are moving the needle in the right direction for AT&T. Upgrading its network to support 5G speeds will encourage its wireless customers to use more data. Data is the leading margin driver for the company's wireless segment.
Additionally, moving to 5G speeds is helping AT&T land new broadband customers. This should be the sixth consecutive year it adds at least 1 million net broadband subscribers, which increases the likelihood of its customers bundling their services.
But perhaps the best thing about AT&T as an investment is its meaningfully improved balance sheet. As of the end of March 2022, just prior to completing the spinoff of content arm WarnerMedia, AT&T was sitting on $169 billion in net debt. But after more than $40 billion in concessions following the merger of WarnerMedia with Discovery to create Warner Bros. Discovery, AT&T's net debt has shrunk to $128.7 billion, as of Sept. 30, 2023. This means its nearly 7% dividend yield is secure moving forward.
Johnson & Johnson
Healthcare conglomerate Johnson & Johnson (JNJ -0.46%) is the second phenomenal stock in Buffett's secret portfolio that's a surefire buy in 2024. Even with the legal overhang of roughly 100,000 lawsuits that allege the company's now-discontinued baby powder causes cancer, J&J is perfectly positioned to deliver for its patient shareholders.
There are only two publicly traded companies that bear the coveted AAA-credit rating from Standard & Poor's (S&P), a division of S&P Global, and J&J is one of them. S&P has the utmost confidence that Johnson & Johnson can service and repay its outstanding debts. J&J's pristine balance sheet and substantive operating cash flow is why a potential settlement for the outstanding lawsuits isn't a huge concern.
What makes Johnson & Johnson such an incredible buy is its more than decade-long shift toward pharmaceuticals. Brand-name drugs generate considerably higher margins and afford J&J excellent pricing power, in relation to the consumer health products division (Kenvue) the company recently spun off.
Johnson & Johnson is also cheaper than it's been in a long time. Its forward price-to-earnings (P/E) ratio of 14.7 represents a low-water mark from where the company closed out the previous 10 years.
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Bank of America
A familiar name in Warren Buffett's secret portfolio that you'll also find in Berkshire Hathaway's $361 billion investment portfolio is Bank of America (BAC -0.21%). Despite near-term recessionary concerns dragging down BofA's stock, the company finds itself in prime position to take advantage of the current economic climate.
To begin with, bank stocks are inherently cyclical. This is to say they thrive when the U.S. economy is firing on all cylinders and struggle during periods of contraction. The thing is, recessions are historically short-lived. Only three of the 12 U.S. recessions following World War II have lasted at least one year, with none surpassing 18 months. Over long periods, bank stocks like BofA tend to grow right alongside the U.S. and global economy.
Something else to note about Bank of America is its sensitivity to interest rates. No money-center bank will see its net-interest income swing more from changes in the prevailing interest rate than BofA. With the Federal Reserve combatting historically high inflation, the 525-basis-point aggregate increase in the federal funds rate has added billions in net-interest income to Bank of America's bottom line each quarter.
Lastly, there's plenty of value for long-term investors to latch onto. BofA stock ended Dec. 4 approximately 6% below its book value. Being able to purchase shares in a top-tier bank for less than book value makes Bank of America a screaming bargain.
PayPal Holdings
Fintech stock PayPal Holdings (PYPL 2.90%) is another company found in Warren Buffett's secret portfolio that stands out as a genius buy for the upcoming year. Although an above-average inflation rate has threatened to reduce the discretionary spending power of low-earning workers, PayPal's key performance metrics are headed in the right direction.
Even amid a challenging economic climate, the total payment volume (TPV) traversing PayPal's networks, which includes Venmo, has continued to grow by a double-digit basis, excluding currency movements. If TPV can sustain low-double-digit growth with the near-term economic outlook uncertain, imagine how quickly it'll grow on a sustained basis during a multiyear period of expansion.
PayPal's user engagement trends are, arguably, even more important. When 2020 came to an end, active accounts were completing nearly 41 transactions over the trailing-12-month (TTM) period. But as of Sept. 30, 2023, the average number of transactions on the platform for active accounts had risen to 56.6 over the TTM. Since PayPal is primarily a fee-driven company, a more-engaged user base will lead to higher gross profit.
Fintech's industry leader is also trading at its lowest valuation since being spun off by eBay in 2015. Shares can be purchased right now for less than 11 times forward-year earnings, which compares to an average forward-year multiple of 35 over the past five years.
Alphabet
The fifth phenomenal stock in Warren Buffett's secret portfolio that makes for a screaming buy in 2024 is Alphabet (GOOGL 10.22%) (GOOG 9.96%), the parent company of internet search engine Google and streaming platform YouTube. Specifically, New England Asset Management owns the Class A shares (GOOGL).
For well over a decade, Google has been Alphabet's foundational operating segment. In November, it accounted for 91.5% of global internet search share, which was more than 88 percentage points higher than its closest competitor. Businesses understand that Google gives them the best chance to target consumers with their message(s), which in turn affords Alphabet excellent ad-pricing power.
However, Alphabet's future is all about its faster-growing ancillary operations. YouTube is attracting more than 2.7 billion monthly active users, which is bound to drive ad-pricing power in its favor. Meanwhile, Google Cloud has produced three consecutive quarterly profits and has gobbled up 10% of worldwide cloud infrastructure service share. Cloud service margins are considerably juicier than advertising margins and could really spice up Alphabet's cash flow in the second-half of the decade.
To keep with the theme, Alphabet's stock is historically cheap and ripe for the picking. Even following a healthy 46% year-to-date gain, Alphabet shares can be picked up for a little over 13 times forward-year cash flow. That compares to the multiple of 18 times cash flow Alphabet has averaged over the previous five years.
