There aren't many money managers who can captivate the attention of professional and everyday investors like Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) billionaire CEO, Warren Buffett. Since the appropriately named "Oracle of Omaha" took over as CEO six decades ago, he's led his company's Class A shares (BRK.A) to an eye-popping cumulative return of almost 5,650,000%, as of the closing bell on Feb. 3.
Given Buffett's overwhelming long-term success, investors closely monitor which stocks he and his top advisors, Todd Combs and Ted Weschler, are buying and selling. After all, riding the Oracle of Omaha's coattails has proven quite profitable for patient investors.
What's arguably been the biggest factor that's helped Buffett run circles around Wall Street is his penchant for portfolio concentration. Although Buffett is overseeing a 44-stock, $297 billion portfolio at Berkshire Hathaway, he's long-believed in putting more capital to work in his best ideas.
At the moment, roughly two-thirds (nearly $195 billion) of Berkshire's $297 billion of invested assets can be traced to five magnificent stocks.
For quite some time, tech stock Apple (NASDAQ: AAPL) has been Warren Buffett's largest holding at Berkshire Hathaway. Despite Berkshire's chief overseeing the sale of more than 615 million shares of Apple from Oct. 1, 2023 through Sept. 30, 2024, the 300 million shares still owned by Berkshire equates to a $68.4 billion in market value.
Apple's success throughout the years has been driven by its innovation. This includes the physical products that have endeared its brand with consumers, such as the top-selling iPhone (in the U.S.), as well as the company's out-of-the-box advances. For instance, CEO Tim Cook is spearheading Apple's shift to become a platform-based company. Emphasizing subscription services should lead to steadier sales and cash flow, and lift the company's operating margin over time.
To build on this point, Apple is a well-recognized, high-value brand that has a generally loyal customer base. Buffett may not fully grasp the ins and outs of how the iPhone works, but he's previously opined that he understands consumer buying habits and behaviors.
Buffett likely also appreciates Apple's world-leading share buyback program. Including Apple's latest quarterly report, the company is closing in on $750 billion in aggregate share repurchases since initiating a buyback program in 2013. These buybacks are having a decisively positive impact on its earnings per share (EPS).
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Even though the Oracle of Omaha hasn't purchased a single share of credit-services provider American Express (NYSE: AXP) in a long time -- it's Berkshire's second-longest holding (since 1991) -- it's worked its way up to the No. 2 position in Berkshire Hathaway's portfolio and now accounts for a sixth of invested assets.
What makes AmEx, as American Express is commonly known, such as a special company is its ability to profit from both sides of the transaction counter. In the U.S., it's the third-largest payment processor by credit card network purchase volume. Helping to facilitate transactions earns it a predictable fee from merchants and allows AmEx to benefit from lengthy economic expansions.
But American Express is also a lender. Though not all payment processors double dip and act as lenders, AmEx's decision to provide credit lines to personal and business cardholders gives it the ability to collect annual fees and/or interest income.
AmEx has historically had a knack for attracting higher income clientele, as well. Although the well-to-do aren't immune to economic downturns, they're less likely than the average earner to alter their spending habits or fail to pay their bills during periods of minor turbulence. By focusing on high earners, American Express can soften the blow of recessions.
Financials happen to be Warren Buffett's favorite sector to put his company's capital to work. While Buffett has disposed of more than 266 million shares of Bank of America (NYSE: BAC) stock since July 17, 2024, it still accounts for close to an eighth of invested assets.
The beauty of bank stocks like BofA is that they're cyclical. Whereas three-quarters of all recessions since the end of the World War II were resolved in less than a year, most periods of economic expansion endure for multiple years. This disparity between recessions and periods of expansion allows BofA to prudently grow its loan portfolio over time.
Furthermore, Bank of America is the most interest-sensitive of America's largest banks by total assets. When the Federal Reserve was scrambling to get the prevailing rate of inflation under control and rapidly increased the federal funds rate by 525 basis points between March 2022 and July 2023, no money center bank benefited more than BofA. With the nation's central bank now walking on eggshells as it attempts to reduce interest rates, Bank of America will have plenty of time to generate highly profitable loans.
Don't discount BofA's capital-return program, either. The company's $1.04-per-share base annual dividend should generate nearly $797 million in income for Berkshire Hathaway in 2025. Additionally, BofA spends a pretty penny on share buybacks most years.
None of the 44 stocks in the portfolio Buffett oversees at Berkshire Hathaway have been fixtures longer than consumer staples giant Coca-Cola (NYSE: KO). This marks the 37th consecutive year it's been a part of Buffett's portfolio, and it's grown into Berkshire's fourth-largest holding.
What the Oracle of Omaha probably appreciates most about Coca-Cola is the predictability of its operating results. Since it has ongoing operations in all but three countries (Cuba, North Korea, and Russia), Coca-Cola is able to take advantage of higher-growth opportunities in emerging markets, all while generating consistent cash flow in developed countries.
Coca-Cola also understands its customer very well. Its marketing team has embraced social media channels and the rise of artificial intelligence to tailor advertisements to younger consumers. Meanwhile, it has over a century of storied history, including its former holiday tie-ins, to lean on as a means to connect with its mature customers. Put this together and you have a company that's been the most-chosen brand from retail shelves for 12 consecutive years, according to Kantar's "Brand Footprint" survey.
To keep with the theme, Coca-Cola's capital-return program is on another level. Although no public company can match Apple in the buyback department, only a handful of businesses can top Coke's streak of increasing its base annual payout for 62 straight years (and counting).
The fifth magnificent stock that collectively, with Apple, American Express, Bank of America, and Coca-Cola, accounts for two-thirds of Berkshire Hathaway's $297 billion portfolio, is integrated energy company Chevron (NYSE: CVX).
Although Chevron generates is highest margins from its upstream drilling segment, and therefore benefits when the spot price of crude oil and natural gas are climbing, the "integrated" aspect of its operating model is of the utmost importance. Chevron oversees transmission pipelines, chemical plants, and refineries, all of which can provide predictable operating cash flow and help to offset declines in the spot price of crude oil.
In addition to being well-hedged, Chevron has steadily increased its production over time. CEO Mike Wirth believes the company's Permian Basin output will grow by 9% to 10% in 2025, with capital expenditures (capex) coming in at a midpoint estimate of $15 billion, which is notably lower than $16.4 billion in capex for 2024. This should be a recipe for improved operating cash flow and higher profits.
The cherry on top for Chevron is that it, too, fosters an impressive capital-return program. Its board approved a $75 billion share repurchase program in 2023, and the company announced its 38th consecutive annual increase to its dividend last week.
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Bank of America and American Express are advertising partners of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Chevron. The Motley Fool has a disclosure policy.
Warren Buffett Has Two-Thirds of Berkshire Hathaway's $297 Billion Portfolio Invested in 5 Magnificent Stocks was originally published by The Motley Fool
