Published March 9th, 2020
This is a guest contribution by Harvi Sadhra, CEO and Founder of Hashtag Investing. Hashtag investing is an exclusive community for stock investors to get real-time feedback and discover compelling stocks and strategies any time.
When it comes to value investing, few are as good as Warren Buffett. The Oracle of Omaha has been one of the most successful investors on Wall Street for several decades now. The essence of value investing is buying stocks that trade lower than their intrinsic value and this discount is called the margin of safety, a term coined by Buffett’s mentor- Benjamin Graham. Many of the value investing members on Hashtag Investing consistently watch to see what changes Berkshire makes to its portfolio.
Here we look at the top five holdings of Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B), in terms of investment value. And since the broader markets are in correction right now, investors have an opportunity to buy these stocks at a more attractive valuation.
Apple Inc. (AAPL)
Warren Buffett has placed a huge bet on Silicon Valley’s blue-eyed boy. Berkshire Hathaway bought 245 million shares in this tech giant which are currently worth over $70 billion. In the last five years, Apple has gained 134% easily outpacing the broader markets.
The stock is currently trading 12% below record highs. Apple stock almost doubled in 2019 on the back of strong supply chain metrics for its latest lineup of iPhones. According to market research firm Gartner, Apple and Xiaomi were the only two major smartphone players to gain market share and experience a shipment growth in the December quarter.
Apple is set to benefit from the launch of three 5G enabled smartphones later this year which will be a key revenue driver for the company. While the iPhone still generates majority of sales, investors are optimistic about Apple’s high growth Services segment as well.
The company’s wearable devices such as the AirPods and Apple Watch are raking in billions in revenue. Apple Music is now the second largest streaming service in the world while Apple TV+ is also off to a strong start making Apple an enviable bet for 2020 and beyond.
Bank of America (BAC)
Berkshire Hathaway’s second largest investment is financial heavyweight, Bank of America. The company owns 925 million shares of the latter worth ~$23.8 billion. Bank of America has experienced a huge pullback in recent days and is trading 28% below its record highs.
The coronavirus outbreak has dented investor confidence. However, Bank of America has performed exceedingly well in recent years. In 2019, the company managed to increase deposits by 5% while its loan book was up 7%. These are pretty good numbers in an economy that is slowing.
The recent correction has meant that the stock now has a forward yield of 2.7% and the company bought back over 9% of outstanding shares last year, further increasing shareholder wealth. With a forward price to earnings ratio of 8.6 and estimated earnings growth of 9.1% in 2020, Bank of America is trading at an attractive valuation.
Berkshire Hathaway’s third-largest investment is consumer giant and Dividend Aristocrat, Coca-Cola. Berkshire owns 400 million shares in Coca-Cola worth ~$22 billion. Coca-Cola’s stock has lost just over 8% since the sell-off and has largely managed to hold its own ground in this correction. Warren Buffett has previously mentioned that he would never sell Cola-Cola.
Founded over 130 years back, Coca-Cola is one of the world’s largest beverage companies. It has been a massive wealth creator for long-term shareholders. Warren Buffett first invested in this stock back in the 1980’s and has seen its investment in this company grow from $1.3 billion in 1994 to its current value of $22 billion.
The coronavirus scare and global shift to health-oriented drinks might not make the stock as attractive to current investors. However, Coca-Cola continues to add new product lines to its portfolio including water, sugar-free drinks and juices.
Analysts tracking Coke expect revenue to grow by 4.6% in 2020 and by 5% in 2021. Comparatively, earnings growth is estimated at an annual rate of 8.4% over the next five years.
American Express Company (AXP)
Another financial company part of the Berkshire Hathaway portfolio is American Express. Berkshire owns 151 million shares worth ~$16.4 billion in American Express. Similar to most other credit card players, shares of American Express also moved lower recently driven over fears of low consumer spending.
Peer companies including Visa and Mastercard have also lowered their guidance for the upcoming quarters to reflect the impact of the virus outbreak. American Express stock is down 22% from record highs and has been one of the worst performers in the Dow Jones Industrial Average since February 19.
In case the virus continues to spread in the U.S., credit card spending could see a massive decline further impacting investors. However, investors need to remember that this is a short-term headwind and the fundamentals of American Express continue to remain strong.
American Express stock is also trading at a low forward price to earnings multiple of 12 and with estimated earnings growth of 9.9%, it is one of the cheap stocks on the Dow Jones currently.
Wells Fargo (WFC)
Wells Fargo is Berkshire Hathaway’s fifth-largest holding. Berkshire owns 323 million shares in the company worth almost $12 billion. In the fourth quarter of 2019, Berkshire sold off 55 million shares in Well Fargo and reduced its exposure by 14% in this company.
Unlike other stocks in Buffett’s portfolio, Wells Fargo has grossly underperformed the S&P 500 and Dow Jones in the last five years. Wells Fargo investors have lost over 32% in the last five years and while its dividend yield of 5.2% is attractive, its tepid earnings growth is likely sway investors.
Wells Fargo is also grappling with trust issues since 2016 when the company accepted that over 3.5 million unauthorized accounts were created. The company has since seen two changes at the helm and its sluggish performance in recent years might test investor patience.