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The Oracle of Omaha and successor Greg Abel share many investment ideals, including an insatiable desire for value stocks.
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For the better part of 60 years, billionaire Warren Buffett has been dazzling Wall Street with his ability to spot amazing deals hiding in plain sight. Since taking the reins as CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in the mid-1960s, he's overseen a nearly 5,900,000% cumulative return in his company's Class A shares (BRK.A).
But all good things must come to an end.
During the tail end of Berkshire's annual meeting in early May, the Oracle of Omaha announced his intent to retire from the CEO role by the end of this year. Though he'll remain chairman of the board, the CEO and head investment advisory role will be turned over to Greg Abel, who's currently the vice chairman of noninsurance operations.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
In many respects, Abel has vowed to prudently build atop the foundation that Buffett and his late right-hand man Charlie Munger laid. Abel will likely lean on share repurchases when it makes sense to do so, and will look to purchase stakes in wonderful businesses at a fair price.
But there's only one Warren Buffett. When he's no longer CEO in roughly four months, some changes in Berkshire Hathaway's $298 billion investment portfolio are to be expected. This may include showing one of Berkshire's core holdings to the door.
Although a big shake-up in Berkshire's portfolio isn't expected, the closest thing to a guarantee under Abel's tenure is that Buffett's eight "indefinite" holdings, as he described them in his annual letter to shareholders last year, are off-limits.
The longest-tenured holdings in Buffett's portfolio, Coca-Cola (KO 0.01%) and American Express (AXP +0.01%), aren't expected to be touched by Abel. Coca-Cola and AmEx shares have been held since 1988 and 1991, respectively.
Due to the exceptionally low cost bases of roughly $3.25 per share in Coca-Cola and approximately $8.49 per share in American Express, Buffett's company is locking in an annual yield on cost of almost 63% in Coca-Cola and close to 39% in AmEx. There's simply no reason to sell when the income is this impressive.
Though it's only been held for a few years, integrated oil and gas company Occidental Petroleum (OXY +0.01%) is also viewed as a forever holding by the Oracle of Omaha.
Oil is an essential component of energy production, and Buffett is a true believer in the U.S. economy growing over time. Occidental's heavy reliance on upstream drilling, as well as its ability to partially hedge weakness in the spot price of crude oil through its pipeline and chemical operations, should allow it to generate positive operating cash flow in most economic climates.
Finally, all five of Japan's trading houses, commonly known as the "sogo shosha," are considered indefinite holdings by Buffett. This includes stakes ranging from 8.5% to 9.8% in Mitsubishi, Itochu, Mitsui, Marubeni, and Sumitomo.
Aside from the sogo shosha being heavily diversified, their management teams receive reasonably low compensation, and they all offer impressive capital-return programs. To boot, their price-to-earnings (P/E) ratios are in the high single digits or low double digits, at a time when the U.S. stock market is at its third-priciest valuation dating back 154 years, per the Shiller P/E Ratio.
Image source: Apple.
While Warren Buffett's forever holdings are likely untouchable, this isn't necessarily true for Berkshire Hathaway's other core holdings. Considering that Greg Abel shares many of the same investing values as the Oracle of Omaha, Berkshire's No. 1 holding, Apple (AAPL +0.01%), may be shown the door not long after Buffett's retirement as CEO.
There are a number of things Berkshire's billionaire boss appreciates about Apple. In no particular order:
But there are reasons to believe Greg Abel may not be as enamored with Apple stock as Warren Buffett has been.
During Berkshire Hathaway's annual shareholder meeting in 2024, Buffett inferred that the peak marginal corporate income tax rate would increase in the not-too-distant future. With Berkshire lugging around sizable unrealized gains in Apple stock, he figured that locking in some gains at a tax-advantaged rate would, in hindsight, be viewed as prudent by investors.
However, there's much more to this story than just the lowest peak marginal corporate income tax rate since 1939. There's Apple's growth engine, which has completely stalled for three years.
Although the company's services segment has been able to sustain low-double-digit sales growth, Apple's physical devices have somewhat lost their luster. What makes Apple's lack of sales growth and its decline in net income even more egregious are that these slumps occurred during a period of above-average inflation. Even with pricing power in its corner, Apple's physical device sales floundered.
When Warren Buffett initially purchased Apple stock during the first quarter of 2016, he was able to nab this outperformer at a trailing-12-month (TTM) P/E ratio in the low teens. Today, with Apple's net income having gone in reverse spanning three years, its TTM P/E ratio is almost 35!
Abel is going to have a difficult time justifying having 21.3% of Berkshire's invested assets tied up in a company that's historically pricey and not growing much, if at all. Once Buffett steps aside as CEO, don't be surprised if most, or all, of Berkshire's Apple stake follows him out the door.