If you’re looking for the best stocks to buy and hold forever, it’s never a bad idea to borrow a pick or two from Warren Buffett. After all, he is not called the Oracle of Omaha. He has a reason Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) has been able to overcome S&P 500(SNPINDEX: ^GSPC) Over the years
Here’s a rundown of your three best Warren Buffett bets right now, while they’re arguably undervalued.
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The Coca-Cola Company(NYSE: KO ) The world’s largest Drinks name, including Gold Peak Tea, Mint Maid Juice, Dasani Water, and many other brands besides its namesake cola.
It currently does about $46 billion a year, but regularly increases its top and bottom lines. Ditto for its dividend, which has been increased every year for the past 62 years. That reliable income is one of the main reasons why Buffett has stuck with this cash cow since he first stepped into it in 1988.
And don’t look for this streak to end anytime soon, if ever. Unlike the opposite PepsiCoCoca-Cola does not bottle most of its products. Most of its revenue comes from the sale of branded concentrates to franchised bottlers, which in turn handle the production and distribution that get its products onto store shelves.
Although this arrangement means there is less revenue relative to the volume of consumers drinking it, it is a high-margin model because bottlers shoulder most of the cost-based risk. Higher profit margins, in turn, mean higher earnings per-share which supports consistent dividend payments.
Berkshire Hathaway’s 400 million shares of Coca-Cola are worth about $26 billion, by the way — the group’s Fourth largest holding. That in itself is worth taking a cue from.
So, what is Berkshire Hathaway’s single-largest holding? Buffett – or at least one of his lieutenants – is throwing his stake in it apple(NASDAQ: AAPL ) For some time now. However, its remaining 300 million shares (worth $69 billion) leave Apple as Berkshire’s top investment. Again, take the hint.
When Berkshire started buying Apple in 2016, it caught people a little off-guard. Buffett has not generally been a fan of technology stocks, explaining that it is difficult to understand what they are worth because their technologies can be difficult to understand; They may or may not keep competitors at bay.
As time went on, however, Apple’s purchase made more and more sense. Its customers are very loyal, and the company consistently makes competitive products. Its services offerings (apps, digital content, and the like) also now drive the kind of recurring revenue that Buffett has often called for, accounting for about a quarter of Apple’s current top line.
Berkshire shed half its stake in the consumer technology giant alone this year, but don’t read too much into it. Buffett isn’t afraid to load up on a company he believes in, but even by his standards, Apple was becoming a dangerously large position at roughly half the value of all his investments in publicly traded investments.
He may also be wary of sitting on a lucrative option when tax rates on capital gains are about to rise.
An average newcomer like you, however, will not face these concerns. The same reason he liked it still applies to newcomers: Its leadership in the smartphone market and growth in services revenue that iPhone is driving rapidly. Last year’s services business improved another 12%, continuing a well-established growth trend.
Finally, although it’s rarely alluded to when talking about Warren Buffett’s stock picks, you should know that Buffett himself owns Apple, Coca-Cola, or any of the other tickers found within the Berkshire Hathaway portfolio. Not the owner as such.
However, he owns a large amount of Berkshire Hathaway shares — on the order of 15% of Berkshire (which now has a market cap of about $1 trillion), and about a third of the group’s voting shares. As the cliché inelegantly but accurately explains, he eats his own food. In other words, Buffett is on the same side of the table as Berkshire’s shareholders.
It takes some of the excitement out of hunting down some Oracle of Omaha picks for yourself. But investing should be about results first and foremost, and Berkshire Hathaway certainly delivers them. Although it doesn’t happen every year, given enough time, Berkshire itself easily outperforms the broader market.
This is at least partly the result of Buffett’s (and his management team’s) patience with Berkshire’s holdings, which many investors struggle with. But that’s also because the bulk of its value is not in publicly traded stocks, but in the privately held entities that own it.
These include cash drivers such as flooring company Shaw, Duracell Batteries, Pilot Travel Center, Clayton Homes, and Geico Auto Insurance. These are great companies that you can’t have any other way.
Just keep in mind that while Berkshire is collecting a lot of recurring cash from its holdings, it’s not spinning this money out in the form of dividends, which it doesn’t pay out. Instead, it’s hoarding this money, waiting for the next big buying opportunity — something for which Warren Buffett has demonstrated remarkable patience.
So don’t let Berkshire’s current record-breaking cash pile of $325 billion stop you from buying. When the right opportunity presents itself, Buffett will start buying it before announcing it.
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James Brumley There are positions in Coca-Cola. Motley Fool Apple and Berkshire Hathaway hold positions and are recommended. Motley Fool has a Disclosure Policy.
