Warren Buffet is Discarding Apple and Bank of America Shares, Yet These Are the Three Investments He Intends to Retain Permanently
Warren Buffett hasn't found much appeal in the stock market lately. The CEO of Berkshire Hathaway (BRK.A -0.13%) (BRK.B -0.16%) has offloaded more stock than he's purchased in his company's equity portfolio for eight consecutive quarters. This includes selling shares in some of its most profitable investments.
He started offloading Berkshire's substantial Apple position at the end of last year, selling over two-thirds of its stake throughout the past four quarters. Last quarter, he focused on Bank of America as well. Since the end of June, he's sold 26% of what was Berkshire's second-largest position.
Despite slashing his stakes in some of Berkshire's largest equity holdings and completely selling off smaller positions, Buffett has identified three top stocks he plans to hold indefinitely. Buffett refers to these as "exceptional" businesses, and they might be worth considering for your portfolio as well.
1. American Express
Buffett began building a position in American Express (AXP 0.61%) in the early 1990s and hasn't touched it since.
American Express differentiates itself from most other credit card issuers by operating its own payment network. Banks usually partner with third-party payment networks like Visa or Mastercard to process payments whenever a credit card is used or swiped. Those two companies generate billions in revenue just by ensuring money moves from one account to another.
As its own network operator, American Express retains all of those swipe fees. They amounted to $8.8 billion last quarter, up 4% year over year, representing over half of total revenue. This growth was slightly disappointing due to Berkshire's corporate clients (about 30% of its total) underperforming its consumer and international cardholders.
However, network volume growth is slowing, but American Express is seeing more and more customers opt for premium cards with high annual fees. Card fees increased 18% year over year, reaching $2.2 billion. Net interest income is also a growing revenue stream, rising 16% and surpassing $4 billion last quarter.
The shift toward higher-end cards presents a significant competitive advantage for American Express. It suggests that it has a more affluent customer base that is less likely to cut spending during economic downturns. This shift also attracts more merchants to collaborate with Amex to draw in high-spending customers, increasing the value of holding an Amex card.
Shares of American Express have climbed 45% in 2024 so far. This has pushed its forward price-to-earnings ratio (P/E) to approximately 18. The stock has spent more time trading below this level than above it during the past decade, which may make investors hesitant to purchase shares at the current price. However, the business is sound, and it's worth purchasing if shares dip in price.
2. Coca-Cola
Coca-Cola (KO -1.13%) is another long-term Buffett investment, established in the late 1980s and early 1990s.
Coca-Cola boasts several competitive advantages that make it an appealing long-term investment for Buffett. First of all, the brand is globally renowned. And aside from its namesake product line, the company owns 11 other billion-dollar brands.
This brand strength has been evident in the company's ability to increase pricing in the face of rapid inflation. Prices increased 10% year over year last quarter, albeit with 4 percentage points due to markets experiencing intense inflation.
Another advantage is Coca-Cola's global scale. This allows the company to maximize the value of its supply chain and distribution deals. It can easily introduce new products because it holds the upper hand in negotiating with retailers for shelf space. This has enabled it to increase its already formidable market share worldwide.
Shares of the stock have pulled back from its all-time high reached earlier this year. They now trade at a reasonable 22 times forward earnings estimates. This is around the company's average and is a reasonable price to pay for the market leader.
3. Occidental Petroleum
Occidental Petroleum (OXY -1.14%) is a new addition to Berkshire's portfolio. Buffett acquired $10 billion worth of preferred shares in the company in 2019 to help Occidental acquire Anadarko.
He has since expanded his stake in the common stock, while Occidental has retired some of Berkshire's preferred shares. It currently holds approximately 27% of Occidental's shares outstanding.
The energy company has more oil production exposure than other integrated operators. Its position in the Permian Basin in the Southwest provides it with a relatively affordable source of U.S. oil production.
It recently expanded upon this position with the acquisition of CrownRock, which closed at the start of August. CEO Vicki Hollub estimates that this acquisition will increase free cash flow by $1 billion as long as West Texas Intermediate crude oil trades around $70 per barrel.
Unfortunately, the price of oil has dropped significantly during the past six months, putting Occidental in a precarious position, considering the amount of debt it took on to make the CrownRock acquisition. Its leveraged oil production exposure has brought Occidental's share price down to levels it hasn't seen since the beginning of 2022.
It's intriguing that Buffett hasn't jumped at the chance to acquire shares of this firm at these reduced prices, having done so consistently for over two years straight. In his 2023 shareholder letter, he mentioned: "Nobody can predict oil prices for the next month, year, or decade. But Vicki [Hollub] has the knack for pulling oil from rocks, and that's a rare skill, beneficial to her shareholders." This, coupled with Buffett's lack of purchases in the recent four months or so, stirs up questions.
However, it's plausible that Buffett is content with Berkshire's existing stake in the company, which is already substantial. He's stated that he has no intention of seizing control of the company.
At around $50 per share, Occidental boasts an enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of merely 5.3. Despite oil price pressures, this is an appealing price for the stock. Plus, if you anticipate an oil price rebound, Occidental could see significant advantages to its free cash flow and share price.
- Despite Buffett's recent moves in Berkshire Hathaway's equity portfolio, he continues to invest in select companies like Occidental Petroleum, showing his belief in the potential for finance and profit in the oil and gas sector.
- If you're considering investing, you might want to look into Buffett's top picks such as Occidental Petroleum, which offers an attractive enterprise value to EBITDA ratio, demonstrating its financial strength and potential for growth in the finance and energy sectors.
