Famed investor Warren Buffett is known for finding quality businesses at a good value and holding them over time. When his conglomerate Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) first began investing in Apple (AAPL -0.35%) in 2016, that stock traded at a steep discount to the market -- with a price-to-earnings (P/E) ratio in the range of 10 to 14.5 that year. Back then, sentiment was negative -- there was a widespread view that Apple's growth was plateauing, its market expansion had played out, and its products were limited -- not to mention it didn't have the high-margin services segment it has today.
A lot has changed since then. But Apple has once again lost its market premium. Over the last six months, the S&P 500 is up 14.6%, while Apple stock is down 4.9%. On March 1, Apple sold off, and the S&P 500 rose. At one point, Apple's P/E ratio fell below the S&P 500's, but it ended up finishing the day at 27.9, which was, coincidentally, the same as the S&P 500.
Berkshire Hathaway's other top public equity holdings -- Bank of America (BAC -0.21%), American Express (AXP -0.62%), Coca-Cola (KO), Chevron (CVX 0.37%), and Occidental Petroleum (OXY -0.15%) -- are all trading at discounts to the S&P 500. Combined with Apple, these six companies make up 78.4% of Berkshire's portfolio.
Let's consider why Buffett and his team like these companies, and the qualities that make them good long-term holdings.
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Brand power
In Berkshire Hathaway's most recent letter to shareholders, Buffett praised his longtime partner Charlie Munger for many things, including a key lesson he taught Buffett.
Charlie, in 1965, promptly advised me: "Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale."
Back then, Buffett was known for buying decent or bad businesses because their book values were higher than their market values. Munger taught Buffett that if he was going to be a great investor managing a larger amount of money, he would have to pivot away from that scrappy strategy toward something more sustainable.
Berkshire's top stock holdings today reflect this shift. Apple is the undisputed leader in smartphones, consumer electronics, and wearable devices, and offers a wide range of services, many with high margins.
Bank of America is the second-largest diversified bank behind JPMorgan Chase.
American Express is a top credit card company, along with Mastercard and Visa (which Berkshire also owns shares in).
Coca-Cola is the most valuable U.S.-based beverage company.
Chevron is the second-biggest U.S.-based oil major, behind ExxonMobil. And Occidental Petroleum, commonly known as Oxy, is one of the most valuable exploration and production companies and, assuming its deal with CrownRock L.P. goes through, will become one of the top producers in the Permian Basin -- the largest onshore oilfield in the U.S.
In sum, Berkshire's biggest stock holdings are all among the top dogs in their respective industries. Many of them have another attribute that Buffett loves -- capital return programs.
Rewarding shareholders
Over the last five years, Apple, Bank of America, and American Express have all boosted their dividends and bought back stock at impressive rates.
AAPL Shares Outstanding data by YCharts.
Coke and Chevron have focused primarily on growing their dividends. Both have increased their payouts by more than 50% in the last 10 years. And Chevron has bought back a boatload of stock over the last two years. In 2023 alone, it spent a record $26 billion on dividends and buybacks.
Occidental Petroleum is a bit of an outlier. In 2020, Oxy cut its dividend from $0.79 per share per quarter to just $0.01 per share per quarter. It has since raised its quarterly payout several times, bringing it up to $0.22 per share, but it hasn't been exactly the type of consistent dividend payer Berkshire usually targets.
Oxy is also known for using debt and leveraging up its balance sheet, which it will do to pay for its pending CrownRock acquisition.
In Berkshire's 2023 letter to shareholders, Buffett praised Oxy's leadership and wrote of his confidence in the U.S. oil and natural gas industry. Oxy stands out as a specific play on a specific theme. It amounts to 4.1% of the public equity portfolio, indicating that Berkshire is taking care to manage the position to make sure it doesn't become too large.
Excellent values worth considering now
You may be wondering, if these companies all have qualities that make them suitable investments, then why would they trade at a discount to the market? Part of the reason is simply the industries that these companies are in.
Financial stocks tend to trade at discounts to the market. So do consumer staples companies like Coca-Cola. The oil and natural gas sector is cyclical, so its P/E ratios tend to be low during growth periods and high during downturns. Investors tend to pay a premium for growth companies relative to slower-growing companies, and they tend to favor stability as opposed to cyclicality.
As for Apple, it has been largely unaffected by the artificial intelligence-induced tech bull market, and is facing slowing growth out of China and competition from Huawei. So its valuation has come under pressure as investors search for companies that are growing in the near term.
Sticking to a process
Berkshire's largest stock holdings showcase its highest-conviction names. Berkshire has owned some of these stocks for decades. Others, like Apple, Chevron, and Oxy, are more recent additions to the portfolio.
The key takeaway is that Berkshire knows what it is looking for, and targets companies that fit its criteria -- not simply those that are tied to whichever hot trend is sweeping Wall Street. Berkshire invests in companies that are good values and have attractive capital return programs through dividends and buybacks.
As an individual investor, it's important to find the types of companies and sectors you like. It's also vital to make sure you align your investments with your risk tolerance. Buffett has often said that Berkshire purposely keeps a massive cash position and is conservative with its investments, but that's because capital preservation and limiting downside risk are integral parts of his philosophy.
If you have a high risk tolerance or are multiple decades away from retirement, taking on more risk could make sense for you. But only if you are comfortable with risk and have the patience to hold onto stocks through periods of volatility.
