It's official. Warren Buffett has asked the board of Berkshire Hathaway (BRK.A 0.03%)(BRK.B +0.14%) to replace him as chief executive officer by the end of 2025. Now 94 years old, Buffett has been signaling a leadership transition for years, carefully building a team capable of heading the diversified business giant in the decades to come.
Before he gives up some of his power, Buffett might choose to up Berkshire's stakes in some of his favorite investments. If that occurs, I'm betting on the three stocks below.
NYSE: OXY
Key Data Points
Berkshire should buy more of this oil company
Buffett is a big fan of Occidental Petroleum (OXY 1.69%). Don't take my word for it -- just ask him. He apparently "read every word" of the company's earnings transcript one quarter, noting that the company's management was doing "exactly what I would be doing." CEO Vicki Hollub was "running the company the right way," Buffett added.
What exactly caused Buffett to fall in love with Occidental? Occidental's revenue stream is largely dominated by upstream production, but it does have some midstream and chemical production assets. Occidental's stock price has outpaced the price of oil during the past five years, suggesting an ability to create value apart from swings in commodity prices. Importantly, however, the company's valuation has increased according to some metrics, accounting for some or even much of that performance.
The company is currently deleveraging itself following the acquisition of CrownRock, and it trades at a reasonable 17.4 times earnings with a 2.2% dividend yield. The company's future will still largely be determined by commodity prices. But Buffett's glowing comments, plus a recent filing that allows Berkshire to acquire as much as half of the total company, suggests that more buying may be on the way. Just last quarter, Berkshire acquired 760,000 more shares -- making this one of the few positions it added to.
Expect Amazon to be a long-term winner
Berkshire already owns $2.1 billion worth of Amazon (AMZN +0.55%). I expect it to buy even more over time. In fact, I expect Berkshire to continue buying Amazon stock long after Buffett departs.
Berkshire first bought shares of Amazon in 2019. Over time, we learned that it wasn't even Buffett who made the call. Instead, it was likely the purchase decision of two of Buffett's lieutenants: Ted Weschler and Todd Combs. Buffett reportedly called himself an "idiot" for not buying Amazon previously.
What does the Berkshire gang love so much about Amazon? There's the sprawling e-commerce division that has a huge economic moat. More than half of all online shoppers check Amazon first before going to any other website, search engines included. But there's also the Amazon Web Services division, which is growing by leaps and bounds thanks to the rapid expansion of artificial intelligence (AI) technologies. The AWS division already contributes more than half of Amazon's operating profit, and the long growth runway of AI should increase the importance of this division for decades to come.
Whether it's the decision of Buffett, Combs, or Weschler, expect Berkshire to continue adding to its Amazon position.
Image source: Getty Images.
Buffett trusts this value stock
Chubb (CB 0.51%) is one of the more boring stocks in Berkshire's portfolio. That's likely why Buffett loves the company so much.
At the core of Berkshire's empire sits a portfolio of insurance companies. These businesses generate extra cash because they don't need to return premiums to policy holders until a claim is filed. For decades, Buffett has used this "free" cash to invest in a variety of securities. So it's safe to say that Buffett understands the insurance sector very well.
The insurance industry has gotten increasingly crowded in recent years. Yet Chubb has been able to generate consistent underwriting profits. Its combined ratio has consistently been below 100%, meaning that it has paid out less in claims than it has collected in premiums. In recent quarters, its combined ratio has been as low as 86% -- an impressive figure in today's tight market.
Don't expect huge moves from Chubb. The stock's beta is just 0.56. But that minimized volatility could allow Buffett to put more of its growing cash pile to work in an industry he arguably understands better than anybody.
