Whenever Warren Buffett's company, Berkshire Hathaway, makes a purchase of any stock, the investment community takes extra notice and often the market reacts specifically to the trade. So today I'd like to take a closer look at the top 5 stocks in Berkshire's holdings.
It should be noted that most of Berkshire's portfolio consists of wholly-owned subsidiaries, not publicly traded securities. As of the end of 2016, the equity portion of Berkshire's holdings was only 19.4%, with the rest being wholly-owned companies, and cash and cash equivalents, as well as the infamous "float" which is technically seen in the liability section of the balance sheet but in reality is a revolving fund of capital which has grown to around $100 billion. The total market value of Berkshire's stock holdings are $161.5 billion, and within those holding we see a very top heavy allocation. The top five stocks in the portfolio make up $104.2 billion, which is over 60% of the entire equity holdings.
It's the stock picks of the billionaire and his conglomerate that seem to excite the financial media, and so far in 2017 Berkshire hasn't acquired any companies, but they have stepped up on some of their biggest stock positions. When Buffet buys a stock, he views himself as a long-term partner and owner in the business. He only buys when he sees a long-term competitive advantage in the company, and the reason is that his ultimate holding period is forever. Below is a look at Berkshire's top 5 equity holdings.
5. American Express Company
Initial Investment Date-1964
Current Market Value-$12.77 billion
Number of Shares Owned-151.61 million
Stake in Company-17.21%
Buffet loves to own and invest in companies that are old with a rich history, and American Express is a prime example of that. The company was founded in 1850 by Henry Wells, William G. Fargo, and John Warren Butterfield, all of whom were magnates in their respective industries previously. This is the same Henry Wells and William G. Fargo who formed Wells Fargo bank as well, which is another of Berkshire's top stocks that I'll get into in a moment.
Buffet first started buying shares in 1964, during a crisis which was known as the "salad oil scandal" at the time. The crisis was based on a company fraudulently filling barrels with water and claiming they were salad oil, which was added to their inventory in order to enable bigger loans from their creditor, American Express. They ended up going bust and Amex took a loss with that particular company, but Warren Buffett saw that this was merely a short term blip for a great business with a solid future ahead of it. He also believed int he the future of the then-burgeoning credit card industry. So he started buying shares.
If I'm not mistaken, American Express is Berkshire's oldest equity position, and Warren has no plans of selling shares anytime soon. The company is currently ranked #86 on the Fortune 500 with revenues of $33.82 billion, a total of 56,400 employees and a market capitalization of 74.27 billion.
4. Coca Cola Co
Initial Investment Date-1988
Current Market Value-$18.23 billion
Number of Shares Owned-400 million
Stake in Company-9.41%
In yet another case of an old company adored by Warren, Coca Cola was founded in 1886 and became a publicly traded company back in 1919. This company serves as a classic example of what Buffet refers to as having a "wide moat." All this means is that the company has a significant competitive advantage over the others in it's industry. This moat is made up of brand loyalty, global customer base, high gross profit margins, and usually being one of the market leaders in the industry.
Berkshire first started acquiring shares of of Coke in 1988, shortly after the devastating stock market crash in 1987 known as "Black Monday." The price of virtually all US traded companies were hit hard, but this presented an opportunity to buy a company that still had sound underlying economics. Yes, the stock market crash was bad, but in the long run the market for drinking Coke's beverages wasn't hampered at all. In 1987 Coke had revenues of $7.65 billion, more recently the company has $41.8 billion in revenue for 2016. Keep in mind that Coke had and still has higher market share than other companies, yet revenues alone still grew at a CAGR of 6.25% over a 28-year period. That's not taking into account any profit margins, strictly the demand from the consumers.
Berkshire hasn't sold any shares of Coca Cola and has no intentions to. The company has raised it's dividend consecutively for 55 years which puts on the elite list of dividend-growth companies. Coke ranks #64 on the Fortune 500 with revenues at $41.8 billion and with 100,300 employees across the world.
There are many investor concerns about younger generations trending towards healthier food and drink choices, which would leave Coca-Cola behind in the past. This is definitely a valid concern IMO but the moat is still there for the company and not going away any time soon.
3. Apple
Initial Investment Date-2016
Current Market Value-20.37 billion
Number of Shares Owned-129.35 million
Stake in Company-2.5%
The initial news that Berkshire bought a stake in Apple surprised many investors, including long-time Buffett followers. It shouldn't come as much a surprise though when you look it over. The main reason is Buffett's longstanding aversion to investing in technology companies. The quick answer to that is that the Steve Jobs-era is over, and Apple is a mass consumer tech products company now, and not quite the innovative disruptor it once was.
It is indeed the biggest company in the world when measured by market capitalization, but how much does this fact limit future growth? That is the question that Buffett obviously feels confident in answering, by loading up close to $20 billion to buy shares of the biggest company on the planet since the second half of last year. He is confident in their moat, and I'm sure he is also pleased at their rate of dividend growth and share buybacks, both of which are wonderfully explained in this video by NYU business professor Aswath Damoradan.
Buffet can see the fierce brand loyalty Apple products have, in particular with iphones.
In spite of having the biggest market cap in the entire stock market, Apple is trading at only 17.9 times earnings, which should mean there's still room to grow. Apple is ranked #3 in the Fortune 500 with $215.63 billion in revenue, and 116,000 employees.
2. Wells Fargo
Initial Investment Date-1989
Current Market Value-$24.91 billion
Number of Shares Owned-479.7 million
Stake in Company-9.67%
This holding has become quite interesting in light of all the recent controversy going on at Wells Fargo over the pats year or so. Buffet has publicly spoken out against the shady practices and the fact that the problem was allowed to continue after upper management heard about it. In spite of this, Buffet is still bullish on the company in general, and has no plans to sell any of his position due to the crisis.
The company itself is another oldie that Warren favors. Wells Fargo was founded in 1852 as a banking as well as express delivery business, which is represented by the stagecoach on Wells' logo. While the horse-drawn carriage method is a little outdated, the company would go on to be a financial giant as it currently ranks as the third biggest bank in the US. Wells ranks in at #25 on the Fortune 500 list with revenues at $94.17 billion and a total of 269,100 employees.
The bank currently has a whopping 1.93 trillion in total assets! As bad as these recent scandals have been, Wells is still one of the big guys that will still be here for a long time to come. Warren may still see validity in their business as a whole but I would personally like to see him exit his position to show a vote of no confidence, or he could work with the directors to try and make real changes but I don't see either situation happening unfortunately.
1. Kraft Heinz
Initial Investment Date-2013
Current Market Value-$28.15 billion
Number of Shares Owned-325.63 million
Stake in Company-26.73%
Kraft Heinz was born from the merger of the two consumer brand giants in 2015, and the deal was co-financed by Berkshire and their friends at 3G Capital. Berkshire and 3G are still the largest shareholders, and 3G was quick to implement their infamous cost cutting measures in order to improve efficiency and boost margins.
This is another situation where changing trends in consumer food choices could definitely affect the long term outlook of this investment. On one hand, these consumer brands definitely have wide moats. When you think of ketchup you probably think of a Heinz bottle, and when you think of cheap, cheesy, easily cookable noodles, who else could you possibly be imagining in your head besides Kraft in that blue box? Countless parents have been thankful to have some Kraft dinners handy when they don't have the energy to cook a full meal for their children, but is the market for this type of food changing?
The long-term investment concern is that the current and proceeding generations of parents will be making healthier choices for their children. While many diet fads to come and go, the general trend is moving towards more less processed foods with less sugar. This doesn't mean that the market for cheap mac n cheese dinners will ever disappear, but I wouldn't expect it to be a growing sector. Overall I think that even the big guys will be forced to start offering consumers healthier and higher quality products over time. Despite a myriad of state distortions, consumer preferences still basically determine what kinds of goods and services business sell in the marketplace.
The dual brand titan ranks at 106 in the Fortune 500 with revenue of $26.48 billion and a total of 41,000 employees. It will be interesting to see if this company can outperform the general market and the other holdings within Berkshire.
Thank you for checking out the article, I hope you enjoyed it!
Sources:
https://www.cnbc.com/berkshire-hathaway-portfolio/
https://www.oldschoolvalue.com/blog/investing-perspective/warren-buffett-career-timeline-investments/
https://seekingalpha.com/article/4051302-buffett-stocks-focus-american-express
http://fortune.com/fortune500/american-express/
https://en.wikipedia.org/wiki/American_Express
http://www.luxuryplastic.com/original-amex-purple-black-card-credit-history/
http://fortune.com/fortune500/wells-fargo/
http://fortune.com/fortune500/coca-cola/
http://fortune.com/fortune500/apple/
http://www.wealthmastery.sg/get-up-close-and-personal-with-mary-buffett-and-learn-her-top-investing-strategies/
http://www.iphone7updates.org/iphone-7-photos/