Author: Matthew Frankel | June 04, 2018
What are Warren Buffett’s favorite stocks?
The stock portfolio of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by billionaire investor Warren Buffett, is perhaps the most widely-followed portfolio in the world. During the first quarter of 2018, Buffett and his team made some notable moves, including one huge investment in a certain tech giant.
To be clear, we don’t know for sure if all of these stock decisions were made by Warren Buffett himself. While Buffett is typically behind the larger portfolio moves, his two stock-pickers -- Ted Weschler and Todd Combs -- have been given increasingly more of Berkshire’s assets to manage, so some of the smaller moves could potentially have come from them.
With that in mind, here are seven stocks that Berkshire Hathaway added to during the first quarter of 2018, and two others that the company sold some of, but that Buffett has said that he still loves.
Apple (NASDAQ: AAPL) was Berkshire’s most significant buy of the first quarter, with the company adding more than 74 million shares to its already-massive investment. Now, Berkshire owns 239.6 million shares of the iPhone maker, worth more than $45 billion at the current price.
This makes Apple the single largest stock investment in Berkshire’s portfolio by a wide margin, and it’s possible that Buffett isn’t done buying just yet.
In a CNBC interview after Berkshire’s annual meeting, Buffett said that he likes Apple so much he’d love to own the entire company. Of course, this wouldn’t be practical, as Apple is a $925 billion company, but Berkshire certainly has the cash available to significantly increase its investment.
Generic drug maker Teva Pharmaceuticals (NYSE: TEVA) is one of the more recent additions to Berkshire’s stock portfolio, with the investment first reported in the fourth quarter of 2017. During the first quarter of 2018, Berkshire more than doubled its investment, and now owns more than $850 million worth of Teva stock.
This is a rather small investment by Berkshire’s standards, but one that could certainly continue to grow. The stock has some clear Buffett-stock qualities -- prescription drugs are a non-discretionary item that are always in demand, there’s a clear trend in the pharmaceutical industry toward more generic drug usage, and management has demonstrated that it is willing to act quickly and make the tough decisions during tough times, just to name a few.
Agricultural giant Monsanto (NYSE: MON) is another stock Berkshire bought quite a bit of during the first quarter. Buffett and company added about 7.3 million shares, bringing the total stake up to nearly 19 million shares.
The timing of Buffett’s purchases couldn’t have been much better. Monsanto’s agreement to be acquired by Bayer AG (NASDAQOTH: BAYRY) for $128 per share was approved by the U.S. Department of Justice just days after the quarter ended, resulting in a nice pop for the stock.
It’s no secret that Warren Buffett loves the banking industry. There are currently eight different bank stocks in Berkshire’s stock portfolio, with a combined value of more than $73 billion.
U.S. Bancorp (NYSE: USB) has long been one of Warren Buffett’s favorite bank stocks, and it’s not difficult to see why. The bank consistently operates more efficiently and generates better profitability than the rest of the largest U.S. banks, and it does so in a responsible manner. In fact, U.S. Bancorp never had even a single quarter of negative earnings during the financial crisis in 2008-2009.
During the first quarter, Berkshire added about 3.8 million shares of U.S. Bancorp to its portfolio, increasing its total stake by 4.4%. At a value of $4.6 billion, U.S. Bancorp is only Berkshire’s fourth-largest bank stock position, but it seems like it’s one that Buffett feels is attractively-valued right now.
Bank of New York Mellon
Bank of New York Mellon (NYSE: BK) is America’s oldest continuously operating bank, founded in 1784. The bank has produced consistently strong results over the years, has a strong balance sheet, and has a diverse revenue stream.
Berkshire has been periodically adding to its position in Bank of New York Mellon, boosting its stake by 3.6% in 2016, for instance. Berkshire added another 1.37 million shares in the first quarter of 2018, and now owns about 62.2 million shares worth approximately $3.5 billion.
Delta Air Lines
Buffett shocked the investment world in late 2016 when it was revealed that Berkshire had taken substantial stakes in the four largest U.S. airlines, after years of criticizing the airline industry. As of the most recent SEC filings, Berkshire owns a 9.8% stake in American Airlines (NYSE: AAL), 7.6% of Delta Air Lines (NYSE: DAL), 8.2% of Southwest Airlines (NYSE: LUV), and 10.0% of United Continental Holdings (NYSE: UAL).
However, the only position Buffett added to in the first quarter was Delta. To be fair, Berkshire’s Delta stake only grew by about $26 million and remains the smallest airline stake in the portfolio, as a percentage of the total outstanding shares, but it definitely seems like Buffett and his team felt like it was the most compelling value of the four.
Berkshire’s airline investments have prompted speculation that the company could potentially acquire an entire airline. Several years ago, Berkshire invested in a few railroads in a similar manner, and ended up buying BNSF, and this situation certainly looks similar.
The final stock position Berkshire added to during the first quarter was building materials company USG (NYSE: USG), which Buffett first bought shares of back in 2000. During the first quarter, Berkshire bought an additional 4.4 million shares of USG, and now owns 31% of the company.
USG is a particularly interesting Berkshire stock because Buffett is taking an uncharacteristically active role in the company. Specifically, Buffett used his influence to pressure the company’s board into entering negotiations to be acquired by Knauf at a price of “at least $42 per share.” Nothing has been finalized yet, at the time of this writing, but with USG shares trading for more than $41 per share, it appears the market feels that a deal will indeed happen.
It may seem odd to include Wells Fargo (NYSE: WFC) on a list of stocks Buffett loves. After all, Berkshire actually sold more than 1.7 million shares of the bank during the first quarter.
However, there are a few things you should know. First, 1.7 million shares represents less than half a percent of Berkshire’s 456.5 million share investment, so it’s not exactly a big sale in that context.
Second, Warren Buffett didn’t sell the stock for any reason to do with the bank’s business. In fact, Warren Buffett said at Berkshire Hathaway’s recent shareholder meeting that he’s not worried about Wells Fargo’s infamous fake-accounts scandal from a long-term perspective, and he told CNBC in a subsequent interview that he thinks Wells Fargo will actually outperform the other big U.S. banks over the next 10 years.
Finally, it’s important to point out that the underlying reason for the sale is to keep Berkshire’s stake comfortably below a 10% ownership interest in the bank, which would open up additional regulatory scrutiny. Berkshire owns about 9.3% of Wells Fargo, and Buffett also has some shares in his personal portfolio, so it’s fair to assume that small sales of the bank will continue, although Buffett likes the stock.
At first glance, Phillips 66 (NYSE: PSX) may seem to be another stock Buffett has lost faith in. Berkshire sold 35 million shares of the oil refiner during the first quarter, which represents a 43% reduction in Berkshire’s stake.
Just like with Wells Fargo, this was a pre-discussed move that was designed to keep Berkshire’s ownership below the 10% regulatory threshold. The shares were sold back to Phillips 66 (not on the open market), and when it was announced in February, Buffett stressed that he planned to hold on to Phillips 66 long-term, and that he only sold for regulatory reasons.
What could be next?
Warren Buffett and the rest of Berkshire’s team are notoriously tight-lipped when it comes to stocks they are evaluating, and for good reason. Even a small investment from Berkshire has the ability to move a stock tremendously.
However, I wouldn’t be surprised to see lots of additional buying this year. Stocks are considerably cheaper than they were at their January 2018 all-time highs, and Berkshire has nearly $109 billion in cash on its balance sheet that it would love to put to work if it can find attractive opportunities.
Matthew Frankel owns shares of Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.