Berkshire Hathaway has been trimming its equity portfolio, but it’s still heavily exposed to these two components.
Warren Buffett took the helm at Berkshire Hathaway in 1965. Since then, shares of the holding company have soared by about 4,631,475%, making him perhaps the most well-regarded investor of his time.
Buffett knows as well as anyone that the price you pay for a stock is a big factor determining the return it will eventually provide. If you’d like to see your portfolio perform the way Buffett’s has, purchasing shares of quality businesses while their stock prices are depressed should be a big part of your strategy.
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The benchmark S&P 500 (^GSPC 0.38%) index has risen by about 36% over the past 12 months, and it looks like Buffett expects continued gains from at least a couple of its components. At the end of September, $98.6 billion of the holding company’s portfolio was invested in two S&P 500 stocks that have lagged the benchmark index, Apple (AAPL -0.12%) and Coca-Cola (KO 0.41%).
Both of these stocks have been trading well below the expectations of Wall Street analysts who follow them closely. Here’s a look at why they’re expected to outperform to see if they deserve a place in your portfolio too.
1. Apple
Berkshire Hathaway has been trimming its Apple stake, but it is still the equity portfolio’s largest holding. The holding company valued its Apple stake at $69.9 billion at the end of September, down from $174.3 billion at the end of 2023.
Apple stock underperformed the S&P 500 index by rising just 25% during the 12 months ended Nov. 8, 2024. Gains have been subdued because it’s been a long time since the iPhone maker launched a new product that can drive sales growth. Trailing-12-month revenue contracted by 0.8% since late 2022.
Apple’s lack of growth is concerning but not for Morgan Stanley analyst Erik Woodring, who thinks the stock can climb much higher. He recently reiterated a $273 price target that implies a gain of about 20% from recent prices.
Whether it was iPhones, Macs, or accessories, sales of every product category were lower in fiscal 2024, which ended on Sept. 30, than they were in 2022. Wall Street isn’t turning its back on the stock because service sales are way up. Over the same 2-year period, revenue from the App Store, streaming, and cloud services grew by 23% to $96.2 billion.
Equipment sales can fluctuate with economic downturns and new product cycles. Recurring-service revenue is often more predictable and nearly always more lucrative. A revenue mix shifting toward services improved gross-profit margin in fiscal 2024 to 46.2% from 43.3% in 2022.
Improving profit margins could help Apple continue raising its dividend payout. The stock offers a tiny 0.4% yield at recent prices, but the yield you receive on your initial investment could be significant by the time you retire. The company was able to raise its quarterly payout by 29.9% over the past five years.
Apple’s services segment appears capable of offsetting declining equipment sales, but the market is expecting a lot of growth in the years ahead. The stock has been trading for about 32.3 times trailing free cash flow. It’s probably a good idea to wait on the sidelines for a more attractive entry point.
2. Coca-Cola
Apple needs to design and source new semiconductors just to keep product sales from falling. If complicated challenges make you nervous, consider another of Buffett’s favorite businesses, Coca-Cola. At the end of September, Berkshire’s stake in the soft drink specialist was worth $28.7 billion.
Buffett isn’t the only investor enamored with Coca-Cola stock. Morgan Stanley analyst Dara Mohsenian recently lowered their price target for the beverage company to $76 per share and reiterated an overweight recommendation. The price target implies a gain of about 19% from recent prices.
Overall sales growth generated by Coca-Cola’s well-recognized brands is predictably positive, but that hasn’t helped the stock much lately. On Nov. 8, it was down by 12% from an all-time high it reached in September.
Wall Street is bullish for Coca-Cola partly because it’s been performing extremely well for a company that is over a century old. In the first nine months of 2024, sales were up by 2%, and there could be significant gains ahead. Management expects 2024 organic sales to rise about 10% year over year.
Coca-Cola’s stock price has been more volatile than usual, but its dividend program is as reliable as they come. In February, the company raised its quarterly payout for the 62nd year in a row. At recent prices, it offers a 3% dividend yield and a reasonable valuation of 22.4 times forward-looking earnings estimates.
With a relatively simple business that grows reliably, investors can reasonably expect continued gains throughout their retirement. Adding some shares of Coca-Cola to a diverse portfolio now looks like a great idea for most investors.
