Warren Buffett owns these five shares. Should I?

Our writer looks at the portfolio of famous share picker Warren Buffett and considers a handful of the shares in it as potential purchases for himself.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Apple

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.

American Express

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.

Coca-Cola

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.

HP

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.

Verizon

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. American Express is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Warren Buffett owns this FTSE 100 stock. But should I?

Warren Buffett rarely invests in FTSE 100 shares but he does have a position in Diageo. Is it time for…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »