Berkshire Hathaway (BRK.A -1.23%) (BRK.B -1.25%) CEO Warren Buffett is indeed in a class of his own when it comes to investing. Since taking the reins in 1965, he has led his company’s Class A shares (BRK.A) to an aggregate gain of more than 3,600,000% last weekend. In other words, Berkshire Hathaway’s stock price could crash 99% and it would still easily outperform the benchmark. S&P500 since early 1965.
While no investor is infallible, Buffett has a way of picking long-term winners. That’s why Wall Street and the investing community pay close attention to the stocks he and his team buy and sell each quarter.
But an even more important exercise might be to note what sectors the Oracle of Omaha favors more than all the others. Although there are 11 different sectors to choose from, Buffett has demonstrated for over a decade that he prefers to invest his money in three specific sectors.
While it’s not the number one sector in Berkshire Hathaway’s portfolio, based on invested assets, there’s no doubt in my mind that financial stocks are Warren Buffett’s favorite place to put his money to work. . By financials, I primarily mean stock banking, insurance companies, and payment processors.
Generally speaking, financial stocks are not going to impress investors on the growth front. They are almost always cyclical businesses, meaning they fluctuate with the US and global economy.
But there is an important distinction to be made about these ebbs and flows. While recessions usually last a few quarters, periods of economic expansion are usually measured in years. Disproportionately long bull markets allow banking stocks and payment processors to thrive in the long run.
In the financial space, banking stocks tend to be Buffett’s favorite, followed by insurance companies. During the last decade, Bank of America (BAC -1.99%) and American bank (USB -1.22%) were among Buffett’s best purchases.
The most attractive aspect of Bank of America is its sensitivity to interest rates. Among the money banks, none sees its net interest income rise or fall more due to changes in the yield curve than BofA. This is particularly noteworthy, with the Federal Reserve aggressively raising interest rates to counter historically high inflation, which hit 9.1% in June 2022.
Each rate hike allows BofA to collect more on its outstanding floating rate loans. Bank of America estimates that a parallel shift of 100 basis points in the yield curve would generate $5 billion in additional net interest income over the next 12 months.
As for US Bancorp, the parent company of US Bank, I’m sure Buffett has come to appreciate its conservative management team and industry-leading digitization push. While most money banks had trouble seeking out risky investments before the financial crisis (2007-2009), US Bancorp mainly focused on the day-to-day business of banking: increasing its loans and deposits. Add to that the exceptionally high percentage of active users who digitally bank with US Bank, and you have an efficient bank with superior return on assets.
A second sector that Warren Buffett absolutely loves to invest his money in is consumer staples. Even though consumer staples stocks make up a considerably smaller percentage of Berkshire Hathaway’s total portfolio than 21 years ago – 43.5% in the first quarter of 2001 versus 11.3% in the first quarter of 2022 – stocks in this sector have often been an integral part of Buffett’s portfolio for well over a decade.
The beauty of consumer staples stocks is that they provide goods and services that people use on a daily basis. No matter how the US economy and stock market perform, people still need to buy toothpaste, detergent, diapers, food, beverages, personal health and beauty items, and more. It’s a sector filled with companies that generate highly predictable cash flows and often pay some of the strongest dividends in the entire market.
beverage giant Coca Cola (KO -1.36%) is by far the most recognized consumer staple stock, and also happens to be the oldest Buffett stock (34 years). It has a presence in all but three countries of the world, which means it generates consistent operating cash flow from developed markets and can generate higher organic growth from emerging markets.
It also doesn’t hurt that Coca-Cola has increased its base annual dividend in each of the past 60 years. Since Buffett’s company has such a low cost base on Coke stock (about $3.25 per share), the Oracle of Omaha more than doubles its initial investment from Coca-Cola’s dividend alone every both years.
In addition to Coke, Berkshire Hathaway also owns shares in a packaged food and beverage company Kraft-Heinz and Procter & Gamble. Kraft Heinz distributes a market-leading 4.3% annual return, while Procter & Gamble has increased its annual base payment for a jaw-dropping 66 consecutive years.
Technology (with an asterisk)
The third and final favorite sector where Warren Buffett likes to make his money grow is technology. However, this sector is accompanied by a small asterisk. Although it currently represents Berkshire’s largest sector by invested assets and has accounted for a double-digit percentage of invested assets in all but two quarters over the past 11 years, the love of Buffett for tech stocks is limited to a few companies. In other words, when Buffett bets on tech stocks, it’s often a sizable investment.
The appeal of tech stocks is that they offer higher growth prospects than most other sectors. Growth stocks have led the market higher since the Great Recession and have fully benefited from more than a decade of favorable monetary policy (i.e. low lending rates) from the country’s central bank.
This probably comes as no surprise to investors watching Warren Buffett’s buying and selling activity. Apple (AAPL -0.93%) is his company’s largest holding. At the end of July 2022, Apple accounted for nearly 42% of Berkshire Hathaway’s $353.2 billion investment portfolio. It’s no wonder Buffett called Apple one of his company’s “big four.”
What makes Apple so great is its innovation. The introduction of 5G-enabled iPhones in Q4 2020 has helped propel the company to a U.S. smartphone market share of 50% or more in five of the past six quarters (not including the recently ended second quarter). ).
Innovation is also behind its rapidly growing subscription service segment. Subscription services typically generate high margins, keep customers extremely loyal to the Apple brand, and should help the company better manage the peaks and valleys associated with product replacement cycles. That’s not to say Apple is ditching the products (iPhone, Mac, and iPad) that have helped make it one of the most valuable brands in the world. It is rather a reflection of the evolution of Apple based on innovation.
Other ventures in the tech sector by Buffett include stacking in IBM in 2011 – Buffett eventually exited that position in full in 2018 – and gobbled up an 11.7% stake in the personal computing and printing solutions company HP in April 2022.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams holds positions at Bank of America. The Motley Fool holds and recommends Apple, Berkshire Hathaway (B shares) and HP. The Motley Fool recommends Kraft Heinz and recommends the following options: January 2023 long calls at $200 on Berkshire Hathaway (B shares), January 2024 long calls at $47.50 on Coca-Cola, $120 March long calls 2023 on Apple, short calls of $200 in January 2023 on Berkshire Hathaway (B shares), short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.