OArren Buffett does not claim to be an excellent stock picker. He adamantly maintains that he and his long-time associate, Charlie Munger, are more like “business selectors.” Of course, this ability to pick big companies had resulted in many fantastic stocks coming into Buffett’s portfolio.
What’s the best stock Buffett owns right now? It’s not an easy decision. Here are my picks for the top three contenders.
1. Berkshire Hathaway
There’s no question which stock is Buffett’s favorite. This is Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). That doesn’t automatically make Berkshire Buffett’s best stock. However, I put it at the top of the list for three main reasons.
First, Berkshire offers a significant level of diversification with a single stock. It’s almost like buying an exchange-traded fund (ETF). Berkshire itself has a wide range of successful businesses, including insurers GEICO and General Re, rail operator BNSF and renewable energy leader Berkshire Hathaway Energy. Additionally, the conglomerate holds stakes in more than 40 publicly traded companies.
Second, Berkshire’s financial strength is rock solid. The company has generated leveraged free cash flow of $69.5 billion over the past 12 months. It ended the first quarter with cash, cash equivalents and short-term investments totaling $102.7 billion. Buffett wrote in his last letter to Berkshire shareholders, “We want your business to be financially impregnable.” It’s a big goal – and one that continues to be achieved.
Third, Berkshire has been a huge winner for long-term investors. Of course, there is no guarantee that the future will be as bright as the past. However, Berkshire’s success is largely due to the culture that Buffett has built. This culture will likely survive long after he is no longer at the helm.
You can take most of what I said about Berkshire Hathaway and apply it to marcel (NYSE: MKL) as well. Markel is one of the newest additions to Berkshire’s portfolio. It’s also Buffett’s best new stock, in my opinion.
Markel is basically a “Baby Berkshire”. Its market capitalization of less than $17 billion is less than 3% the size of Berkshire. The company focuses on insurance (in this case, specialty insurance). It also owns various other businesses outside of the insurance industry. And Markel invests in the shares of other companies, including Berkshire Hathaway.
In short, Markel’s business model is a lot like Berkshire’s. Its core business is inflation-resistant, allowing Markel stock to easily outperform the broader stock market this year.
I think over the next decade, Markel could even outperform Berkshire. It helps that the company is smaller. But Markel’s investments also include more higher-growth stocks than Berkshire’s portfolio.
Buffett refers to Apple (NASDAQ:AAPL) as one of Berkshire’s “Giant Four” in its recent letter to shareholders. That’s an apt description. Although Berkshire only owns 5.6% of Apple, the technology stock represents 41.8% of Berkshire’s total investment portfolio.
Apple does not offer the level of diversification that Berkshire and Markel do. However, it’s hard to find a company with higher customer loyalty. Apple is also exceptionally well managed. In 2020, Buffett said Apple was “probably the best company I know in the world.” Earlier this year he wrote that Apple CEO Tim Cook was “brilliant”.
Over the years, Apple has built an extremely sticky ecosystem centered around its iPhone. The company consistently shows solid growth thanks to increased demand for ancillary products and services in this ecosystem as well as its annual iPhone upgrades.
Of course, Apple stock has fallen significantly so far in 2022. This is primarily due to overall stock market weakness, although the company also continues to face some supply chain challenges. But these are only temporary problems. With growth opportunities in augmented reality and self-driving cars, Apple should remain a big winner for Buffett.
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Keith Speights has positions in Apple and Berkshire Hathaway (B shares). The Motley Fool holds and recommends Apple, Berkshire Hathaway (B shares) and Markel. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.