Famed investor Warren Buffett is renowned for his knack for identifying quality businesses at reasonable prices and holding onto them for the long haul. When Berkshire Hathaway first dipped its toes into investing in Apple back in 2016, the tech giant’s stock was trading at a significant discount compared to the market, boasting a humble price-to-earnings (P/E) ratio between 10 to 14.5. At that time, there was a prevailing pessimism surrounding Apple, with concerns over stagnant growth, market saturation, and product limitations. Fast forward to the present, and Apple finds itself once again priced below market standards. While the S&P 500 has surged by 14.6% over the last six months, Apple’s stock has taken a 4.9% decline. On March 1, the market saw Apple’s stock tumble while the S&P 500 thrived, with Apple’s P/E ratio briefly dipping beneath the S&P 500’s before closing the day at a matching 27.9.

Besides Apple, Berkshire Hathaway’s other top equity picks — Bank of America, American Express, Coca-Cola, Chevron, and Occidental Petroleum — are all currently trading at discounts when compared to the S&P 500, together constituting a whopping 78.4% of Berkshire’s portfolio. Let’s delve into the reasons driving Buffett and his team’s interest in these companies and what makes them appealing for long-term investment ventures.

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The Power of Strong Brands

In a recent letter to Berkshire Hathaway’s shareholders, Buffett lauded his long-time partner Charlie Munger for imparting a crucial lesson back in 1965. Munger advised Buffett to move away from purchasing companies solely based on bargain prices, emphasizing the significance of acquiring exceptional businesses at fair valuations. This strategic shift has manifested in Berkshire’s current top holdings. Apple reigns supreme in the realms of smartphones, consumer electronics, and wearable technology, offering an array of high-margin services. Bank of America stands as the second-largest diversified bank after JPMorgan Chase, while American Express holds a premier position within the credit card industry alongside companies like Mastercard and Visa, both of which Berkshire also has stakes in. Coca-Cola holds the mantle as the most valuable U.S.-based beverage firm, and Chevron ranks as the second-largest American oil major after ExxonMobil. Occidental Petroleum, known as Oxy, stands as a prominent player in exploration and production, aiming to elevate its status further with the potential CrownRock L.P. acquisition, positioning itself as one of the leading producers in the Permian Basin, the largest onshore oilfield in the U.S.

Overall, Berkshire’s major stock holdings are dominant forces in their sectors, coupled with another aspect that Buffett values greatly — robust capital return programs.

Rewarding Shareholders’ Loyalty

Over the past five years, Apple, Bank of America, and American Express have impressively ramped up their dividends and share buyback initiatives.

AAPL Shares Outstanding data by YCharts.

Coca-Cola and Chevron, in particular, have prioritized enhancing their dividends, witnessing over a 50% hike in payouts over the last decade. Chevron has also undertaken massive stock repurchases, shelling out a record $26 billion in 2023 solely on dividends and buybacks. In contrast, Occidental Petroleum experienced a dividend reduction from $0.79 per share per quarter to a mere $0.01 per share per quarter in 2020. However, the company has since raised its quarterly dividend incrementally to $0.22 per share, deviating from Berkshire’s usual preference for steadfast dividend payouts.

Oxy has a reputation for leveraging its balance sheet with debt, a practice it intends to continue with the forthcoming CrownRock acquisition.

In Berkshire’s 2023 shareholder letter, Buffett extolled Oxy’s management and expressed his confidence in the U.S. oil and gas sector. Oxy represents 4.1% of the public equity portfolio, indicating Berkshire’s cautious approach in managing the position to prevent it from dominating the portfolio.

Compelling Value Propositions Worth Exploring

One might ponder why these companies, boasting qualities that make them attractive investments, are trading at discounts relative to the market. This discrepancy can be partly attributed to the specific industries these firms operate in. Financial stocks typically trade at markdowns compared to the broader market. Similarly, consumer staples companies like Coca-Cola tend to be undervalued. The oil and gas industry, being cyclical in nature, witnesses fluctuations in P/E ratios during growth cycles and downturns. Investors typically gravitate towards growth-oriented businesses, shelling out premium prices, while favoring stability over volatility.