Berkshire Hathaway Inc. (BRK.A) Chief Executive Officer Warren Buffett says he is making a $58 billion long-term bet on three stocks that have drastically lagged the broader market and continue to face major growth issues. In an annual letter to shareholders released on Saturday, it was indicated that “Oracle of Omaha” now owns nearly $18 billion in combined stock of financial companies American Express Co. (AXP) and Goldman Sachs Group Inc. (GS), both which have sharply trailed the S&P 500 for five years. Meanwhile, the conglomerate now owns $40 billion in Apple Inc. (AAPL), which has also underperformed the broader market in the recent period as investors fear slowing iPhone sales.
A Spotty Record for 3 Buffett Stocks
(1-Year Performance, 5-Year Performance)
- Apple; -2.3%, 130.1%
- Goldman Sachs; -25.9%, 17.8%
- American Express; 7.4%, 17.7%
- S&P 500; 3.8%, 51.5%
Buffett Favors Fundamentals
In last weekend’s highly anticipated note, the legendary investor and billionaire philanthropist said that he and his long-time business partner Charlie Munger do not view their holdings "as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by 'the Street,' expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”
Instead, Buffett and Munger view their holdings as “an assembly of companies that we partly own and that, on a weighted basis, are earning about 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt," wrote Buffett. Berkshire Hathaway’s common stock investments grew from $170.54 billion in market value at the end of 2017, to $172.75 billion by the end of last year.
Despite suffering huge losses thanks to his investment in packaged food giant Kraft Heinz Co. (KHC), the value investor is steadfast in his long-term strategy, remaining less phased by short-term setbacks.
After a sustained period of growth, Apple is now combatting pressure from a decelerating smartphone market, seen as a major threat to the company’s stock price in the long-term. While the Cupertino-based tech titan has doubled down on software and services through segments like Apple Music and the App Store, bears remain concerned about the swiftness of this transition, given more than half of Apple’s total top line comes from its bread-and-butter hardware business. Nonetheless, Buffett continues to praise Apple and its CEO Tim Cook, noting last year that he would buy the company altogether if he could. In a recent interview with CNBC, he noted that he is not focused on Apple’s sales in the next quarter or the next year, but rather the “hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone].”
Goldman Sachs shares have fallen into bear market territory as the bank struggles to diversify and boost profits in key segments. To rub salt into the wound, the Wall Street brokerage is at risk regarding its role in the 1MBD Malaysian bond scandal, which could result in several billions of dollars in fines.
American Express, which was on the rise over the recent years, had a rougher time in 2018 as it faced increasing competition from large competitors such as Visa Inc. (V) and MasterCard Inc. (MA), as well as smaller rivals. The company has been executing on a number of strategic initiatives, such as electronic payment methods and new partnerships.
Despite Buffett’s love for Apple, his approach to investing favors legacy industries and he has historically shied away from tech. Even with the flop of Kraft Heinz, which contributed a $2.7 billion loss to Berkshire in 2018, the investor says that while he overpaid for the position in 2015, he has no plans to sell. With tech giants like Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) dominating the S&P 500 in terms of market value, it should come as no surprise to investors that Berkshire has failed to keep up with the broad market index.