Legendary investor Warren Buffett is known for his stock-picking skills. Here are a handful of shares he currently owns. I am considering whether I ought to buy them for my portfolio too.
Buffett took decades to buy shares in Apple (NASDAQ: AAPL). But when he finally invested, he certainly made a profitable choice. At the end of last year, Buffett’s $31bn Apple shareholding was showing a $130bn profit even before taking dividends into account.
The company is now the largest shareholding in the portfolio at Buffett’s company Berkshire Hathaway. Although Buffett has sold some of his Apple stock – perhaps to avoid overconcentration in his portfolio as the price rose – he still owns most of the stake he built up.
Pundits seem constantly to be predicting imminent bad news for the Apple share price, due to a perceived lack of innovation. But I see that as positive. Apple’s disciplined approach of keeping its product portfolio small makes it simpler for the company to focus on a few blockbusters. It reduces cost and complexity in the business. The brand remains aspirational and has a large installed customer base. That helps generate massive cash flows. Operating cash flow last year was $2bn a week.
I have some valuation concerns about Apple given its price-to-earnings ratio of 26. That looks pricey to me. But the company does have a proven ability to produce strong earnings growth. For that reason, I would consider buying it for my portfolio.
Buffett’s position in financial services giant American Express (NYSE: AXP) has an interesting history. He bought it during what was known as the ‘salad oil scandal’. A small company was involved in a form of invoicing fraud. But the consequence was huge for a number of financial services shares.
The news hammered the American Express share price. But Buffett reckoned it was a storm in a tea cup. The business concerned was connected to only a very small part of American Express’ revenue. So when the stock market beat down the Amex share price, Buffett loaded up. He now owns 19.9% of the company. That stake cost him $1.3bn but has risen in value to $24.8bn.
It is a classic example of Buffett “being greedy when other investors are fearful”. The basic economics of American Express give it what the ‘Sage of Omaha’ calls a moat, or competitive advantage. The brand is prestigious and has a large installed base of both users and merchants. But Buffett was able to buy it at an attractive price. Can I?
Currently, Amex trades on a P/E ratio of around 18. I would prefer it to be cheaper, so if there is a pullback in the share price I would consider buying it for my portfolio. I see Amex as the sort of business that has excellent long-term prospects. But growing economic weakness in key markets like the US could see borrowers defaulting more. That may hurt profits. If that concern leads to a share price fall, it could give me a buying opportunity.
Another longstanding holding in Warren Buffett’s portfolio is the drinks maker Coca-Cola (NYSE: KO). As well as its namesake sugary drink, the company owns a wide portfolio of brands in markets worldwide.
Again, this is a business with a classic Buffett-style moat. Only Coca-Cola has the brand name and formula for its most famous drink. It also has a complex set of distribution arrangements that effectively mean it is the default soft drinks supplier to many retailers and other drinks outlets. The manufacturing cost is low, which means Coca-Cola can benefit from high profit margins.
Although there is a risk that health-conscious consumers will increasingly shun ‘unhealthy’ drinks, the company has been trying to diversify its portfolio for years to help it reflect this concern. Meanwhile, the underlying business model remains attractive. I think it could stay profitable for decades to come.
But while the Coca-Cola share price has increased 22% over the past year, I find it hard to get excited about the prospect of owning the shares. At 28, its P/E ratio is higher than Apple’s – but I do not think its earnings growth prospects are anywhere near as promising. At the moment I would not buy Coca-Cola for my portfolio.
Warren Buffett’s latest shareholding, announced this month, is in computing equipment company HP (NYSE: HPQ).
I find it hard to see HP as a great company. It has some brand recognition, both in computers and printers. But if I think about the sort of comments I hear from Apple customers, the comparison becomes stark. I cannot remember anyone ever raving to me about an HP product let alone the HP brand.
Where is the moat here? The business model may be attractive – overpriced print cartridges are a classic example of the so-called razor and blade model where pricey refills offer attractive profit margins. But that is true of any printer maker, not just HP.
I just do not see what is compelling about the HP business and would not buy it for my portfolio.
Another company that does not excite me much is telecoms provider Verizon. But while the brand may not elicit much emotional response from me, the business model is something I do find attractive. Due to the high capital expenditure required to build and run mobile networks, companies like Verizon that do it have a moat. Its huge installed customer base gives it economies of scale.
Demand for mobile telecoms is probably going to keep growing, in my opinion. It is a highly cash generative business. One risk is that that cash gets used up to fund the capex. But when that does not happen, a company like Verizon can generate big profits to fund dividends. With a 5.3% dividend yield, I would be happy to tuck Verizon away in my portfolio.
Investing like Warren Buffett
What works for Buffett will not necessarily work for me as an investor. But using a similar approach of looking for excellent companies at attractive prices, I could see myself buying several of these shares for my own portfolio.