Author: Jordan Wathen | December 06, 2018
These stocks carry the most weight
Warren Buffett is undoubtedly the greatest investor to ever live. Over a span of more than 50 years, his company, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), has seen its book value grow at a rate in excess of 19% annually, driven primarily by Buffett’s ability to find market-beating stocks. That’s no small feat, as Buffett’s historical performance turned $1 in 1965 into more than $10,880 at the end of 2017.
Berkshire Hathaway’s stock portfolio is simply massive, recently valued at more than $220 billion, making it a major owner of many of the largest companies on the stock market today. In the slideshow that follows, we’ll walk through the 10 largest investments in Berkshire Hathaway’s portfolio and explain how they got there and what Buffett likes about each of them.
1. Apple ($56.0 billion)
Buffett rarely ventures into tech stocks, explaining that technology companies are out of his “circle of competence,” or businesses that he understands well enough to invest in them. But Apple’s (Nasdaq: AAPL) cheap valuation in 2016 led him to take a bold bet on the iPhone maker, believing that the company created loyal customers who are unlikely to switch to competing devices.
Unlike many of the stocks on this list, Apple wasn’t a one-time buy. Buffett has regularly added to Berkshire’s stake, plowing billions more into Apple stock with open market buys over the last three years. The holding company now owns more than 5% of the company, making it the single largest investor in the second-largest company on U.S. markets (depending on the day, Apple or Microsoft are the market’s most highly-valued companies).
2. Bank of America ($25.8 billion)
The story behind this bet is that Warren Buffett dreamed up a way to invest in Bank of America (NYSE: BAC) in his bathtub in 2011. He drew up a plan where Berkshire Hathaway would invest $5 billion into the megabank, collect a 10% dividend on the investment each year, and score warrants to buy up to 700 million shares of the bank at some point in the future.
At the time Buffett made the investment, Bank of America was on rocky footing. The U.S. had just exited the 2008 Financial Crisis, and the ensuing European Debt Crisis left investors to fear Bank of America was soon to be hit by another economic wallop. Buffett didn’t just inject capital into the bank; his investment also gave it his seal of approval.
Berkshire later converted its warrants into 700 million shares of the bank in 2017. In the third quarter of 2018, Buffett added to the stake, buying 198 million more shares, and bringing its stake to $25.8 billion, or roughly 8.8% of the company.
3. Wells Fargo ($23.3 billion)
This San Francisco-based banking giant has been in Berkshire Hathaway’s portfolio for a very long time. Buffett bought in heavily during a slump in real estate prices in California in the early 1990s, holding on and adding to the position over time. Buffett has said that Wells Fargo (NYSE: WFC) has an enduring advantage, thanks to its retail branch network that enables it to gather deposits at interest rates lower than even its most capable peers pay.
These days, Berkshire Hathaway is doing more selling than buying. Buffett wants to keep Berkshire’s stake of Wells Fargo at less than 10% of the company, so as Wells Fargo buys back stock and reduces the number of shares outstanding, Berkshire has to sell shares of the bank to keep its ownership under 10%. Berkshire owned about 9.1% of the bank holding company at the end of the third quarter.
4. Coca-Cola ($18.5 billion)
Given Buffett’s love of Cherry Coke, it’s only fitting that Berkshire has a multi-billion dollar stake in the company. Berkshire purchased $1 billion of the beverage company’s shares in 1989, watching it appreciate in the nearly 30 years since the initial buy.
Some analysts were critical of Buffett’s bet on Coca-Cola (NYSE: KO) at the time, given that the investment grew to roughly one-third of its stock holdings at the end of 1989. It was a massive bet on a massive company, not the kind of investment one would ordinarily expect to generate stellar returns. It didn’t help that later that year, in his annual letter to shareholders, Buffett warned that Berkshire’s returns were likely to decline compared to its historical outperformance. (That warning proved to be overly conservative.)
It wasn’t long before Coca-Cola was a huge winner for Berkshire. By the end of 1991, the $1 billion bet on Coca-Cola was worth $3.75 billion. The gains have only grown over time. Berkshire now owns about 9.4% of Coca-Cola, which it acquired for the low price of less than $1.3 billion.
5. Kraft Heinz ($17.9 billion)
Berkshire’s entry into the foods business began in 2013, when Berkshire and 3G Capital agreed to acquire H.J. Heinz for $28 billion. Berkshire Hathaway acted primarily as a financier, with 3G Capital taking the lead on managing the business from day to day.
Shortly after acquiring Heinz, Buffett and 3G Capital used Heinz to acquire Kraft in 2015. The deal created a powerhouse with eight billion-dollar brands that include Planters, Oscar Meyer, Maxwell House, as well as Heinz and Kraft, of course.
Berkshire’s investment in Kraft Heinz (Nasdaq: KHC) has been controversial. The company’s recent performance has been lackluster, as sales have declined in key categories and investors worry that 3G Capital may have put too much focus on short-term profits and cost cuts instead of the brand's long-term health.
6. American Express ($16.1 billion)
This credit card company was one of Buffett’s earliest “bet the farm” investments. In the 1960s, when Buffett was managing other people’s money for a fee, he sank 40% of his clients’ capital into deeply depressed American Express (NYSE: AXP) shares, quickly doubling his clients’ money on the stock.
Buffett didn’t make another big bet on American Express until decades later, when, throughout the 1990s, Berkshire started acquiring shares. Its ownership increased steadily from 2.4% of the company in 1993 to 11.4% by the year 2000.
Berkshire invested in American Express at an opportune time, buying shares as the company doubled down on its card business as its travelers cheque business reached a peak and ancillary businesses (like Lehman Brothers) were spun off. Today, it owns about 151.6 million shares or 17.6% of the company, valued at approximately $16.1 billion. Not bad for an investment that cost it only $1.3 billion.
7. U.S. Bancorp ($6.6 billion)
This super-regional bank is arguably one of the best banks on the market, backed up by its top-tier performance through economic ups and downs. The bank was profitable throughout the 2008 downturn, thanks to its thrift, conservative underwriting culture, and line-up of fee sources that generate reliable revenue without the risks inherent in lending.
Buffett holds U.S. Bancorp (NYSE: USB) in high regard. In 2009, he said “I would love to buy all of US Bank or Wells Fargo. We can’t, because it would make us a bank holding company.” Instead, Berkshire holds about 125 million shares, making it a 7.7% owner of the bank. Berkshire added to its stake most recently in the third quarter of 2018, increasing it another 24%, suggesting this is one bank stock Buffett is committed to holding forever.
8. Moody’s ($4.1 billion)
Bond ratings are to corporations what credit scores are to people. Moody’s (NYSE: MCO) is one of the big three bond rating firms, making its money by charging fees to companies who want to have their bonds rated so they can be more easily sold to investors.
The bond ratings business is as lucrative as it gets. Because only three companies -- Moody’s, S&P, and Fitch -- effectively have about 90% market share, the major ratings firms don’t have to compete on price to win business. Companies line up to pay for bond ratings because the cost of getting a rating is an investment; what they pay for a rating they save several times over in lower borrowing costs.
At times, Buffett has been critical of Moody’s and bond ratings businesses as a whole, particularly after the 2008 financial crisis, when it became apparent that the agencies were giving high ratings to low quality bonds backed by high-risk mortgages. But Moody’s remains a sizable position in Berkshire’s portfolio, as the Omaha conglomerate owns just about 12.9% of the ratings agency.
9. Goldman Sachs ($4.1 billion)
This investment bank became part of Berkshire’s portfolio thanks to a crisis-era deal in which Buffett lent his financial and reputational capital to the bank when it needed it the most. Shortly after the collapse of Lehman Brothers rattled the markets in 2008, Berkshire invested $5 billion into Goldman Sachs’ (NYSE: GS) preferred stock, scoring a $500 million stream of income thanks to the investment's sky-high 10% yield.
Buffett smartly structured the deal to profit if Goldman Sachs’ stock recovered in value. Berkshire received warrants that allowed it to buy $5 billion of Goldman Sachs’ stock at $115 per share. Goldman Sachs eventually repaid the preferred stock, and Berkshire’s warrants were exercised, netting Berkshire more than 13 million “free” shares of Goldman Sachs.
Berkshire has added to its stake over time, most recently last quarter, when it purchased roughly 5.1 million more shares of the investment bank on the open market. It now owns about 4.9% of the bank worth $4.1 billion.
10. JPMorgan Chase ($4 billion)
Though Buffett has long been a fan of JPMorgan Chase’s (NYSE: JPM) CEO, Jamie Dimon, it wasn’t until 2018 that the bank’s shares were added to Berkshire Hathaway’s portfolio. Berkshire revealed that in the third quarter of 2018, it purchased 35.7 million shares of the bank, giving it a stake worth about $4 billion.
As the largest bank in the United States by assets, JPMorgan is a major player in just about every vertical in the banking industry, from consumer credit cards to investment banking for multi-billion-dollar businesses. Given Berkshire is at or nearing the 10% ownership limit of other big U.S. banks, a bet on JPMorgan Chase is only natural for Buffett, whose stock picks suggest he’s a bull on almost every big bank stock on the market today.
What’s next for Berkshire Hathaway?
Buffett’s conglomerate is eager to put money to work. The company ended the third quarter with nearly $104 billion in cash. This summer, Berkshire loosened the conditions under which the company would buy back stock, hoping to give it more breathing room to deploy cash by buying back its own shares.
The new buyback policy suggests Berkshire’s stock purchases are more important now than ever. When Berkshire buys a stock, the implicit message isn’t just that Buffett thinks the stock is a good investment, but that he thinks it’s a better investment than buying back shares of Berkshire Hathaway.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of Microsoft and Moody's and 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.