Warren Buffett’s favorite holding period may theoretically be “forever,” but he shuffles the stalwarts of his portfolio from time to time, including in the third quarter.
After nine months of Apple and Wells Fargo commanding first and second spots in Buffett’s portfolio, Wells in the third quarter was replaced by Bank of America, catapulting from fourth place. Coke, the pillar of Buffett’s holdings until the end of 2012, bumped to fourth place from fifth place, while Kraft Heinz was relegated to fifth place from third.
Buffett’s largest positions shed significant light on his thinking because they occupy almost 65% of his $221.02 billion portfolio. Though their arrangement has changed, the stocks selected to lead the portfolio remained the same since the middle of 2017, when American Express appeared in the lineup for the last time. And, while the shift toward technology is writ large with the ascendance of his Apple position, the investor continues to favor financials and consumer staples heading into 2019 as he has for decades. The positioning may also indicate how the heirs of the portfolio, fellow managers Ted Weschler and Todd Combs, will move in the future as they help shape it today.
Buffett, who has said he buys great companies at good prices, has poured the most money into the following stocks as of the third quarter.
Apple may fill a bracing 25.79% of the portfolio, up from 14.41% a year earlier, but it is not unusual for Buffett to invest so much in one company. The last time a holding compared was in mid-2015, when Wells Fargo made up 24.16%. About five years earlier, Coca-Cola expanded to 25.03% of holdings. In the past two decades, Buffett’s top positions have tended to represent between 15-25% of holdings.
Berkshire Hathaway at the end of the third quarter owned about 252.5 million shares of the company, giving it a 9.5% stake. It has purchased shares in almost every quarter since the first of 2016. The price has since risen from about $100 to $208 per share on average, and GuruFocus estimates Berkshire’s gain around 26.7% so far.
Both Buffett and Weschler purchased shares of the Apple stake. Weschler discussed why he liked it in a 2016 interview with Germany’s Manager Magazin, emphasizing the economic “moat” that distinguished it from former competitors such as Nokia and Blackberry.
“It is cleaner to make the argument on Apple versus the past names that there is a subscription element to it,” Weschler said.
He also underscored Apple’s innovations in apps and cloud computing.
“As network speed has gotten faster and faster, and with it the information that people can absorb on the network, things like photo applications, and apps, they create a stickier ecosystem,” he said. “Once you are fully invested in the App ecosystem and you have got your thousands of photographs up in the cloud and you are used to the keystrokes and functionality and where everything is, you become a sticky consumer.”
The stock has gained 7.29% overall in choppy trading year to date, but investors and analysts have worried about its lack of new products and announcement that it would no longer report quarterly iPhone sales figures.
Bank of America
In the third quarter, Buffett boosted his Bank of America position by 29.2%, adding 198.3 million shares. By quarter-end, he held 877.3 million shares, or 5.32% of the company.
Buffett started the holding back in 2011 when he invested $5 billion into the struggling company with a right to buy 700 million shares by warrant conversion. He purchased the shares around $7.14 per share, well below their trading price of $26.99 per share at close Tuesday.
In October 2017, Buffett told CNBC that he would own the stock for a “long, long, long time.”
“Bank of America has done a sensational job under [CEO] Brian Moynihan,” he said.
Over the past five years, the bank has grown revenue at a rate of 1%, earnings at a rate of 40% and book value at 3.8% on average. Yet it trades with its lowest price-book ratio in a year at 1.17.
In the third quarter, Bank of America grew revenue by 4% to $22.8 billion, with diluted earnings per share up 42% to 66 cents.
“Responsible growth, backed by a solid U.S. economy and a healthy U.S. consumer, combined to deliver the highest quarterly pre-tax earnings in our company’s history. This marks the 15th consecutive quarter of positive operating leverage, driven by continued growth in deposits, client balances in wealth management, solid loan growth, and disciplined expense management,” Moynihan said in a third-quarter earnings release.
Buffett reduced his holding of Wells Fargo by 2.14% in the third quarter, keeping it at 9.4% of the bank and within his 10% limit. He held 442.36 million shares at quarter-end.
The holding dates back to 1989, when the price traded under $3 per share. Wells closed Tuesday at $51.78, down 11.15% year to date.
The bank delivered nearly flat revenue growth in the third quarter, at $21.9 billion compared to $21.8 billion a year earlier. Net income rose to $6 billion from $4.5 billion. CEO Tim Sloan attributed the results to “transformational changes” it is making, such as lowering expenses, and better business trends, such as increased consumer checking customers, debit and credit card use and loan origination.
Wells’ price-book ratio also declined to its lowest level in two years at 1.46. It price-earnings ratio of 12.82 and price-sales ratio of 3.1 both hover near two-year lows.
At third quarter-end, Buffett’s Coca-Cola holding spanned 9.4% of the portfolio as he resisted adding to or subtracting from the holding.
The sugary beverage giant has struggled to adapt to changing tastes and increasing health consciousness among consumers. This year, investors have approved of its efforts, sending the stock up 9.11% to $49.58 per share Tuesday.
Some of the company’s moves include forging a strategic partnership with Bodyarmor, a fast-growing sports nutrition and drink company, and expanding its offerings of kombucha and fruit-flavored beverages. In the first half of 2019, it expects to close on a deal with Costa Limited that will give it a global reach in coffee. It also announced several leadership changes, including electing a new president and chief operating officer to guide its transition.
In the third quarter, Coca-Cola announced a 9% drop in revenue largely due to refranchising its bottling operations, while organic revenues grew 6%. Margins expanded 600 basis points, while earnings per share from continuing operations improved 62% to 54 cents.
GuruFocus data shows that the company trades near a 10-year high, with a price-book ratio of 11.75 and price-sales ratio of 6.71, both near their respective 10-year highs as well.
A Buffett stock since 1988, Coca-Cola appears to continue to hold his seal of approval despite the changing landscape, at least for now.
The Kraft Heinz Co.
Buffett held 325.6 million shares of Kraft Heinz Co., or 26.7% of the company, in a position untouched since the third quarter of 2015. Unlike his other stakes in public companies, Buffett took a hands-on roll at Kraft Heinz, who backed the merger between Kraft Foods and Heinz that created it and served on its board until April.
The packaged food giant has faced headwinds of changing consumer preferences and increased commodity costs as well as stronger competition from newer brands. Consequently, its shares tumbled 33% year to date, closing Tuesday at $49.98.
In the third quarter, Kraft booked a 1.6% increase in net sales to $6.4 billion, with net income down 33.8% year-over-year to $630 million, or 51 cents a share. The maker of Jello and Heinz ketchup attributed the results to its efforts to fight back against changing currents with commercial investments and marketing.
Kraft Heinz furthered its shift in focus last week when it acquired Primal Kitchen, which it called a “young, vibrant, better-for-you brand” of condiments and oils. The company will join Kraft’s modish Springboard initiative, designed to partner with brands that will “disrupt” the food industry. The third quarter also saw the introduction of a slew of other creations including Heinz Mayochup and the acquisition of Ethical Bean Coffee.
The company trades at historical low valuations, though they did not entice Buffett to purchase more shares in the third quarter. In addition to a five-year low share price, Kraft Heinz has a price-earnings ratio of 6.05, price-book ratio of 0.95 and price-sales ratio of 2.37, each near a five-year low.