Warren Buffett took control of Berkshire Hathaway in 1965, bringing his considerable investing acumen to bear on the small textile business. Berkshire has since become a $780 billion company under his leadership, and its per-share market value has increased nearly 4,400,000%. A substantial portion of that value comes from its $367 billion stock portfolio.
Buffett reportedly manages 90% of those invested assets, according to Barron's, and the largest holdings are mostly or entirely under his control. Meanwhile, co-investment managers Todd Combs and Ted Weschler handle the other 10% of the portfolio.
Buffett and his team have a significant sum of money concentrated in a handful of stocks, including the three detailed below:
Apple (NASDAQ: AAPL): $176.2 billion (48%)
Coca-Cola (NYSE: KO): $23.5 billion (6.4%)
Visa (NYSE: V): $2.2 billion (0.6%)
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Those three stocks collectively account for 55% of Berkshire's equity securities portfolio, hinting at high conviction. All three companies have achieved phenomenal success, but are the stocks worth buying today?
1. Apple
Buffett likes companies with a sustainable economic moat. He once wrote: "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."
Apple has a moat built on brand authority and patented technology that affords the company substantial pricing power. Its devices pair appealing hardware and proprietary software to create a somewhat unique user experience for which consumers are willing to pay a premium. The average iPhone sells for 3.5 times more than the average Android phone.
Apple reported mixed financial results in the September quarter. Total revenue was roughly flat at $89 billion, with declining sales across Mac, iPad, and wearables offset by a modest increase in iPhone sales. But generally accepted accounting principles (GAAP) net income jumped 13% to $1.46 per diluted share, driven by a 16% sales increase in high-margin services, the segment most likely to be the growth engine in the coming years.
Building on that, Apple has a strong presence in several consumer electronics verticals, including its position as the second-largest smartphone manufacturer in the world. In total, the company has an installed base that exceeds 2 billion devices, and it monetizes those users with services like App Store downloads, iCloud storage, and Apple Pay, as well as subscription products like Apple Music. Those services earn a much higher gross margin than hardware.
Turning to the future, Wall Street expects Apple to grow earnings per share at 9.1% annually over the next three to five years. In that context, its current valuation of 31.4 times earnings looks expensive. Personally, I would wait for a cheaper price before buying this stock. But Berkshire has 48% of its portfolio invested in Apple, which points to immense confidence on behalf of Buffett and his team.
2. Coca-Cola
Coca-Cola has a moat built on brand authority and scale that affords the company pricing power and cost advantages. Brilliant marketing and a broad network of bottling and distribution partners positioned the company as the leader in carbonated soft drink (CSD) sales across most geographies. Coca-Cola holds nearly twice as much CSD market share in the U.S. as PepsiCo, and its profit margin is more than twice as high.
Coca-Cola reported solid financial results in the September quarter. Revenue increased 8% to $12 billion on modest growth in product volume and price increases, and GAAP earnings climbed 9% to $0.71 per share. But the company has only tapped a small fraction of its $1.3 trillion addressable market.
Coca-Cola has considerable growth opportunities in emerging markets across Latin America and the Asia-Pacific region, though it still has headroom in North America and Europe as well. The company is also leaning into noncarbonated beverage categories like coffee (Costa) and sports drinks (Powerade, BodyArmor), and it recently started experimenting with alcoholic beverages.
Going forward, Wall Street expects Coca-Cola to increase earnings at 6% annually over the next three to five years, roughly in line with the five-year average. That consensus estimate makes its current valuation of 23.8 times earnings look a bit pricey, despite being a discount to the three-year average of 27.3 times earnings. Personally, I would wait for a cheaper entry point, but income investors should think twice before passing on the stock.
Coca-Cola increased its quarterly dividend for 61 consecutive years, earning the company a place among the Dividend Kings. The most recent payout was $0.46 per share on Dec. 15, 2023, which translates to an above average dividend yield of 3.1%. History says that dividend will grow in the future, and Coca-Cola's high profit margin and sound balance sheet support that assumption.
3. Visa
Visa has a moat built on prodigious scale reinforced by a powerful network effect, which affords the company a substantial cost advantage. Specifically, Visa operates the largest card payments network in the world as measured by purchase transactions. And because the company can spread expenses across more transactions, it consistently earns higher profit margins than smaller peers like Mastercard and American Express.
That excess profitability allows Visa to reinvest more aggressively in growth prospects across its three core markets: consumer payments, new flows, andvalue-added services. To clarify, new flows refers to commercial and account-based payments, and value-added services refers to issuing, acceptance, advisory, and risk management solutions.
Visa reported solid financial results in the September quarter. Revenue rose 11% to $8.6 billion, driven by robust growth in new flows and value-added services, and non-GAAP net income climbed 21% to $2.33 per share. Investors can expect similar momentum in the future as digital payments become more prevalent around the globe.
Looking forward, Wall Street expects Visa to grow earnings per share at 14% annually over the next three to five years, roughly in line with the five-year average. In that context, its current valuation of 31.5 times earnings appears tolerable, especially when the three-year average is 35.5 times earnings.
Readers may have noticed that Berkshire has a much smaller stake in Visa than it does in Apple or Coca-Cola. But I included Visa for a specific reason. I believe it is one of the most compelling Buffett stocks to buy right now.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long January 2025 $370 calls on Mastercard, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
55% of Warren Buffett's $367 Billion Portfolio Is Invested in Just 3 Stocks was originally published by The Motley Fool
