Based on what Warren Buffett says and what he owns, it would not be surprising to see Berkshire buy stakes in these 13 stocks.
Berkshire Hathaway is renowned as the most successful investment management firm over the six decades since Warren Buffett bought a struggling New Bedford, Mass., textile business in 1965 and turned it into a holding company for a collection of wildly profitable investments. Investment returns have compounded more than 19% annually since Buffett followed the counsel of his friend and eventual business partner Charles Munger to modify his investment approach from a pure value strategy to one that focused more on consistency.
Munger passed away in November at the age of 99, and Buffett in his annual letter to shareholders last month paid tribute to the beneficial influence of his longtime lieutenant and investing consigliere, especially after he bought the Berkshire Hathaway textile business.
“Charlie, in 1965, promptly advised me: ‘Warren, forget about ever buying another company like Berkshire, but now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at a small scale.’”
‘Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire.’
Warren E. Buffett, 2023 Berkshire Hathaway Shareholder Letter
Patiently holding stakes in high-quality companies like Coca-Cola, American Express and Apple for long periods of time has paid off handsomely, and Berkshire’s outright ownership of companies like Geico, Burlington Northern Santa Fe and See’s Candy has piled up stacks of cash.
At the end of 2023, the 93-year-old Buffett’s Berkshire Hathaway held $167.6 billion in cash and cash equivalents, accounting for 31% of the Omaha firm’s total funds available for investment, which includes $370 billion worth of stock holdings.
Buffett does not practice market timing, nor does he engage in economic prognostication, but his market outlook can be divined from the buying appetite of Berkshire, which sold more in stocks than it bought last year, helping to boost its cash level up 30% from $128.5 billion at the end of 2022.
“I think it’s less of a market outlook and more of a market valuation commentary, because Buffett is incredibly sensitive to valuation,” says Meyer Shields, who follows Berkshire Hathaway and other companies in the insurance industry at Keefe, Bruyette & Woods.
Buffett acknowledges in his current shareholder letter that his company holds cash “far in excess of what conventional wisdom deems necessary” but explained that such prudence has always been part of the plan and very much in character with his investment discipline.
“Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire,” writes Buffett. “In most years – indeed in most decades – our caution will likely prove to be unneeded behavior – akin to an insurance policy on a fortress-like building thought to be fireproof.”
On The Hunt For Buffett’s Next Wonderful Business
A stock portfolio with 31% in cash might represent a defensive allocation for many individuals, but for an investment manager like Buffett, the idle funds represent tons of dry powder ready for deployment into stocks that pass muster. With Berkshire’s well-documented 59-year portfolio history and Buffett never shy about sharing his thoughts, there is no shortage of breadcrumbs to follow on the trail to where Berkshire might be looking for fresh ownership opportunities.
“We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring,” wrote Buffett in his annual letter published in late February. “At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure.”
Turning the Oracle of Omaha’s investing philosophy into a system for selecting stocks that endure requires defining what makes a business wonderful and a price fair in terms of specific characteristics.
Buffett-Style Bargains
What will Berkshire Hathaway do with all that cash? Here are some strong candidates with fitting fundamentals.
| Company | Market Cap (bils) | Dividend Yield | P/E Ratio | Return On Equity | Return On Assets |
|---|---|---|---|---|---|
| Johnson & Johnson (JNJ) | $390.9 | 3.0% | 15.2 | 31.6% | 13.6% |
| Home Depot (HD) | $382.3 | 2.4% | 25.0 | 1144.3% | 19.3% |
| Procter & Gamble (PG) | $374.1 | 2.4% | 24.6 | 30.0% | 13.3% |
| Merck & Co. (MRK) | $323.2 | 2.4% | 14.9 | 41.7% | 17.6% |
| AbbVie (ABBV) | $313.9 | 3.5% | 15.9 | 142.1% | 14.3% |
| IBM (IBM) | $171.5 | 3.6% | 18.6 | 34.2% | 6.7% |
| Progressive (PGR) | $110.0 | 0.2% | 20.6 | 21.9% | 5.5% |
| Chubb (CB) | $101.9 | 1.4% | 11.6 | 13.3% | 3.6% |
| Old Dominion Freight Line (ODFL) | $48.5 | 0.5% | 34.5 | 30.4% | 23.0% |
| Ulta Beauty (ULTA) | $26.6 | 0.0% | 21.5 | 54.7% | 21.5% |
| Cincinnati Financial (CINF) | $17.8 | 2.8% | 18.1 | 7.8% | 2.9% |
| Selective Insurance Group (SIGI) | $6.3 | 1.3% | 13.4 | 14.8% | 3.3% |
| Winnebago Industries (WGO) | $2.1 | 1.7% | 12.4 | 13.7% | 6.8% |
“There are three essential things that make a stock suitable for Berkshire,” says Charles Rotblut, who heads up research at the American Association of Individual Investors and is editor of the AAII Journal. “One criteria is that it has reasonable valuation, two is that it’s profitable with a high return on equity and assets, and third is consistency in profit and cash flow margins.”
Checking out the current Berkshire portfolio, Apple boasts 160% return on equity and 29% return on assets, big reasons why it makes up 45% of Berkshire’s investment in common stocks and has been its largest holding since 2019. Accounting for another 45% of the portfolio are the next 10 largest holdings—which include iconic companies like Bank Of America, American Express, Coca-Cola, ChevronCVX, Occidental Petroleum, and Kraft Heinz.
“The traditional Buffett stock is a large cap industry leading company headed by capable people because Buffett’s shown that he’s not into kicking out management and getting involved in a turnaround situation,” says Vahan Janjigian, chief investment officer at $2 billion (assets) Greenwich Wealth Management, and author of Even Buffett Isn’t Perfect.
Despite a longstanding avoidance of technology stocks, Berkshire held shares of IBM and endured a wealth-destructive experience from 2011 until purging it from the portfolio in 2018. Don’t cry for Buffett, however, because his next major foray into the technology sector was when Berkshire started buying Apple in 2016, becoming its most valuable holding three years later. Now IBM seems to be emerging from its funk, with revenue rising in each of the past three years.
Janjigian says IBM and several large cap stocks seem to be superb candidates for Buffett’s next buys: Home Depot and Procter & Gamble, as well as big pharmaceutical names AbbVie, Merck and Johnson & Johnson.
“Buffett has shown a preference for companies that pay good dividends and grow them at stable rates, so these stocks would make a lot of sense in Berkshire’s portfolio.”
Given his deep knowledge and appreciation of the industry from his ownership of Geico, insurance is another area in which Buffett is likely scouting opportunities. Berkshire just last year bailed out of Marsh McLennan, but still holds stakes in Aon and Insurance Australia Group.
“Not every insurance company is great, and Buffett has been appropriately critical of Geico’s competitors that pursue float at the expense of underwriting profit, but there are a number of high-quality companies worth considering, and Chubb which is the most obvious example of a very large, very well-run company on the specialty side,” says KBW’s Shields. “I’d highlight Progressive on the personal side, and Cincinnati Financial and Selective Insurance Group on the commercial side, because these are companies that have mastered the soft science of treating your agents and customers well with analytics that are necessary to survive.”
Even though the stereotypical Buffett stock is a well-established dividend payer with dominant market share, 31% of Berkshire’s stocks pay no dividends but they do display other desirable characteristics that make them attractive. Current holdings that don’t pay cash to shareholders include VisaV, Mastercard, Davita, Verisign and Amazon.
Results of a “Buffettology” stock screen at AAII.com present several stocks that would be attractive uses for some of Berkshire’s excess cash. One of them is Ulta Beauty, the country’s largest specialized beauty retailer, offering a mouth-watering 62% return on equity and 23% return on assets alongside 22% annual earnings growth since 2018.
North Carolina-based trucking company Old Dominion Freight Line is the second biggest trucker in the U.S. and boasts 32% return on equity and 24% return on assets. Earnings have grown 18% annually over the past five years.
Minnesota-based Winnebago Industries is a juggernaut in the RV industry, growing profits 14% annually since 2018. Winnebago, which had revenues or $3.43 billion in 2023, offers a 1.7% dividend yield and 13.5% return on equity.
John Dobosz is editor of Forbes Dividend Investor, Forbes Billionaire Investor and Forbes Premium Income Report. This article was first published on forbes.com and all figures are in USD.