Few investors are more revered on Wall Street than Berkshire Hathaway (BRK.A 0.69%) (BRK.B 0.19%) CEO Warren Buffett. That's because he's overseen a 19.8% average annualized return in his company's Class A shares since 1965. This is double the total annualized return, including dividends, of the broad-based S&P 500 (9.9%) over the same time span.
The Oracle of Omaha's recipe for success has a number of ingredients, including long holding periods, a love of dividend stocks, and penchant for buying into cyclical businesses. But it's the concentration of Berkshire Hathaway's investment portfolio that's really played a key role in delivering outsize returns for more than a half-century.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
As I've pointed out before, Buffett and his team have piled a significant percentage of their company's invested assets into just a few stocks. What you might not realize is Berkshire's portfolio concentration is even more magnified when examined by sector. Approximately 94% of the $321 billion investment portfolio Buffett oversees is invested in only four sectors, based on Form 13F data, as of Dec. 31.
Information technology: 41.87% of invested assets
When 2022 came to a close, Berkshire Hathaway held stakes in seven tech stocks, including value play HP, semiconductor giant Taiwan Semiconductor Manufacturing Company, and cloud data-warehousing company Snowflake. But the lion's share of this 41.87% stake belongs to Apple (AAPL 1.02%).
To venture a guess, I'd say that Apple is the only tech stock Warren Buffett has played any role in purchasing for Berkshire Hathaway's portfolio. The Oracle of Omaha tends to concentrate his research on sectors and industries where he has a deep understanding. Technology isn't one of those sectors that he's typically devoted a lot of attention to. This means Berkshire's other tech holdings were probably purchased by Buffett's investing lieutenants, Ted Weschler and/or Todd Combs.
But there are a number of clear reasons why Apple represents such a large percentage of invested assets. For one, it's a well-known brand that consumers gravitate to. Brands that keep customers loyal are businesses that are bound to catch the Oracle of Omaha's attention.
Apple's innovation also plays an important role in its outperformance. The company's iPhone commands roughly half of all U.S. smartphone market share, while its subscription services segment is putting up record sales figures.
However, Apple's capital-return program might be its biggest lure. Apple is parsing out $14.55 billion annually in dividends, and it's repurchased in excess of $550 billion of its common stock since the beginning of 2013.
Financials: 24.52% of invested assets
Though these sector weightings are skewed by Apple's outsized position, financials have historically been Warren Buffett's favorite sector to invest in.
The reason Buffett loves financial stocks so much is because they're cyclical. Even though economic downturns are inevitable, they don't last very long. Comparatively, periods of economic expansion are usually measured in years. For buy-and-hold investors like Warren Buffett, the natural expansion of the U.S. and global economy over time allows bank stocks, insurers, payment processors, and credit-rating agencies to expand in lockstep.
Bank of America (BAC -0.08%), American Express (AXP -0.02%), and Moody'sare the big dogs for Berkshire Hathaway. AmEx and Moody's are among Buffett's longest-held stocks -- since 1993 for American Express and 2001 for Moody's -- while BofA is Berkshire Hathaway's second-largest holding behind Apple.
The current economic climate is a particularly interesting time for Bank of America and American Express. Normally, the fear of a recession would coerce the Federal Reserve to soften its monetary policy and potentially reduce interest rates to spur lending. But with inflation still historically high, the nation's central bank continues to aggressively rate interest rates.
For lending institutions like Bank of America and American Express, rising rates means the possibility of higher net interest income more than offsetting loan losses. In other words, there's a chance financials could outperform in the profit column during an economic downturn.
Image source: Getty Images.
Energy: 13.88% of invested assets
For the second consecutive quarter, energy is a top-three sector for Berkshire Hathaway. The 13.9% weighting represents the highest percentage of invested assets devoted to energy stocks this century for Buffett's company.
The prevailing catalyst behind energy stocks is the expectation that the price of energy commodities (specifically oil) will remain elevated. Thanks to a broken global energy supply chain, this thesis does hold water.
One year ago, Russia invaded Ukraine, which put Europe's oil and gas supply needs into question. Additionally, global energy companies have reduced their capital investments for the past three years due to demand uncertainty associated with the COVID-19 pandemic. Underinvestment in drilling, exploration, and infrastructure could make it difficult for domestic and global oil supply to be increased anytime soon. More often than not, supply constraints have a positive impact on the spot price of crude oil.
The intriguing aspect of Berkshire Hathaway's energy holdings is that it only owns two stocks: Chevron (CVX 0.34%) and Occidental Petroleum (OXY -0.41%). But these have turned into massive positions within Berkshire's portfolio.
Although both companies are integrated operators -- i.e., they own midstream and/or downstream assets, in addition to drilling assets -- they have their differences. Chevron has a much cleaner balance sheet and its board recently OK'd an up to $75 billion share buyback. Meanwhile, Occidental has more net debt to dig out from. However, Occidental's revenue mix is also more reliant on drilling, which may allow it to take advantage of sustainably higher oil prices even more than Chevron.
Consumer staples: 13.72% of invested assets
The fourth sector responsible for highly concentrating Warren Buffett's portfolio is consumer staples. Berkshire Hathaway holds five consumer staples stocks that account for about 13.7% of the company's invested assets. While that's a slightly higher weighting than at the end of 2021 (11.56%), it's a far cry from the 45% weighting consumer staples had in Buffett's portfolio in 2010.
What attracts investors like Buffett, Weschler, and Combs to consumer staples stocks is their predictability. No matter how poorly the U.S. economy performs or how high inflation flies, people still need to buy food, beverages, detergent, toothpaste, toilet paper, and a variety of other goods. Consumer staples are often profitable, time-tested businesses that deliver predictable cash flow and a rock-solid dividend.
Among Berkshire Hathaway's five consumer staples stocks, it's Coca-Cola (KO 0.14%) and Kraft Heinz (KHC 0.99%) that stand out.
Coca-Cola is Buffett's longest-tenured holding (35 years and counting) and arguably the most-recognized consumer goods brand on the planet. Coca-Cola is operating in all but three countries worldwide, which allows it to generate predictable cash flow in developed markets and to take advantage of organic growth opportunities in faster-growing developing/emerging market regions. Recently, co*ke increased its base annual dividend for a 61st consecutive year.
As for Kraft Heinz, it might be one of Buffett's worst investments. Though it enjoyed a brief organic growth surge during the pandemic, with consumers favoring easy-to-make meals and snacks over going out to eat, Kraft Heinz continues to lug around a lot of long-term debt, goodwill, and intangible assets. Without much financial flexibility, it could be difficult to sustain interest in its brands.
American Express and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, HP, Moody's, Snowflake, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
