Warren Buffett’s Portfolio is More Concentrated Than Ever: 3 Stocks Make Up 63% of Invested Assets

When Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett speaks, everyday and professional investors wisely pay attention. Although the Oracle of Omaha, as he’s come to be known, isn’t infallible, he’s crushed the broader market since becoming CEO in 1965. The 3,787,464% cumulative return in Berkshire’s Class A shares (BRK.A) through Dec. 31, 2022 was 153 times greater than the total return, including dividends paid, of the S&P 500 over the same span.

What’s interesting about Warren Buffett’s investment philosophy is that any investor can follow in his footsteps. He’s not using any fancy charting tools or software to make his stock selections. Rather, he’s buying stakes in what he deems to be “wonderful companies at a fair price” and holding those investments for very long periods.

But the “Buffett-ism” that doesn’t get nearly enough attention is the Oracle of Omaha’s penchant for portfolio concentration. In the view of both Warren Buffett and right-hand man Charlie Munger, diversification is only necessary if you don’t know what you’re doing. When Buffett and his investment team find a company they really like, they’re not afraid to pile in.

Following the latest round of Form 13F filings with the Securities and Exchange Commission, Warren Buffett’s portfolio is more concentrated than ever. With additional purchases to two of Berkshire Hathaway’s top holdings, just three stocks now comprise 63% of the $333.4 billion investment portfolio. Note, this doesn’t include shares held by New England Asset Management (aka, Buffett’s secret portfolio).

Apple: $157.4 billion (47.2% of invested assets)
Perhaps it comes as no surprise to those who closely monitor Warren Buffett’s buying and selling activity that he and his investing lieutenants (Todd Combs and Ted Weschler) added to one of his favorite businesses during the first quarter: tech stock Apple (AAPL). The roughly 20.4 million shares purchased in Q1 increased Berkshire Hathaway’s holding in the company to nearly 915.6 million shares. As of May 16, Apple accounted for more than 47% of invested assets.

In Warren Buffett’s eyes, Apple is “a better business than any we own.” He’s certainly correct that it checks all the boxes investors would look for in a highly profitable company with a sustainable moat.

For instance, Interbrand has anointed Apple as the world’s most-valuable brand for the past 10 years. That doesn’t happen by accident. It’s a reflection of Apple’s innovation driving consumer interest, as well as consumers having trust in the brand. Few companies are more well-known globally, or have a more loyal customer base.

Apple has also been firing on all cylinders for years with its physical products and subscription services. Since releasing a 5G-capable iPhone in late 2020, it’s commanded around a 50% share of smartphone sales in the United States. Meanwhile, subscription services are becoming an ever-more-important source of cash flow for Apple. CEO Tim Cook is masterfully leading this transition to a services-driven future.

But the best thing about Apple, at least for Warren Buffett, might be its capital-return program. It’s paying out more than $15 billion in dividends to its shareholders each year, and it’s repurchased $586 billion worth of its common stock over the past 10 years. These repurchases are increasing Berkshire Hathaway’s ownership stake in Apple without Buffett or his team having to do a thing.

Bank of America: $28.3 billion (8.5% of invested assets)
The second top holding Warren Buffett added to during the first quarter is money-center giant Bank of America (BAC).

The Oracle of Omaha and his team purchased close to 22.8 million shares of BofA, increasing Berkshire’s ownership stake in the company to 12.9%. Although a greater than 10% position in a bank would normally qualify the owner as a bank holding company, the Federal Reserve Bank of Richmond approved Berkshire Hathaway in August 2020 to up its stake in BofA to as much as 24.9% without any constraints.

Though Apple may be viewed as the better business of any Berkshire owns, bank stocks are where Buffett is most-comfortable putting his company’s money to work. Despite bank stocks being cyclical, they’re able to take advantage of the disproportionate amount of time the U.S. economy spends expanding, relative to contracting. This allows banks to grow their loans and deposits, and therefore their profits, in lockstep with the U.S. economy over the long run.

One of the more unique aspects of Bank of America is its interest rate sensitivity. Among money-center banks, none sees their net interest income fluctuate more because of changes in interest rates. With the Federal Reserve aggressively raising interest rates in response to historically high inflation, BofA’s net interest income has jumped significantly. It’s possible Bank of America could deliver earnings growth, even if the U.S. economy were to dip into a recession.

However, Bank of America’s unsung hero might just be its technology investments. As of the March-ended quarter, BofA had 45 million active digital users, saw 68 million more transactions completed with Zelle than via checks written, and saw 51% of all sales completed online or via mobile app. Digital sales are considerably cheaper for banks than in-person or phone-based interactions. This digital transformation should steadily improve Bank of America’s operating efficiency.

Coca-Cola: $25.3 billion (7.6% of invested assets)
The third stock that collectively accounts for 63% of Berkshire Hathaway’s invested assets and shows that Warren Buffett’s investment portfolio is more concentrated than ever is beverage company Coca-Cola (KO). Although the Oracle of Omaha and his investment team haven’t added to their Coca-Cola stake in quite some time, it does have the distinction of being Berkshire Hathaway’s longest continually held stock at 35 years.

What makes Coca-Cola such an attractive stock for an investor like Buffett is the predictability of cash flow that it offers. Coke is a consumer staples stock, which means it provides a good or service that tends to be in demand no matter how well or poorly the U.S. or global economy is performing. While consumers can pare back on some discretionary purchases during economic downturns, they still need food and beverages.

Further helping Coca-Cola’s cause is the company’s virtually unparalleled geographic diversity. With the exception of Cuba, North Korea, and Russia, Coke has operations in every other country worldwide. This means it can count on predictable cash flow from developed markets, while continuing to move the needle with higher organic growth potential in emerging markets. All told, Coca-Cola has 26 global brands that are generating at least $1 billion in annual sales.

Marketing is another reason Coca-Cola keeps delivering for its shareholders. The company is spending more than half of its ad budget on digital messages that are targeting a younger audience. However, Coke also has relatable ambassadors, a globally recognized brand, and decades’ worth of holiday tie-ins that help it cross generational gaps with ease.

And did I mention that Coca-Cola is putting some serious cash in the Oracle of Omaha’s pockets? Because of Berkshire Hathaway’s ultra-low cost basis of $3.2475 per share in Coca-Cola, Buffett’s company is enjoying a 57% annual yield relative to its cost basis. There’s absolutely no incentive for Buffett or his investing lieutenants to sell this position — especially with Coke increasing its base annual payout for 61 consecutive years (and counting).

— Sean Williams

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Source: The Motley Fool