Warren Buffett’s investing decisions since taking over Berkshire Hathaway back in 1965 helped guide shares of the holding company to a 3,787,464% return through the end of 2022. Buffett has demonstrated a sustained gift for identifying outstanding businesses that create lasting wealth for shareholders, and Berkshire’s current stock holdings include several top brands that would make solid additions to anyone’s portfolio.
Two Berkshire holdings stand out for their brand strength, and one of them trades at a bargain price. Let’s look at why Buffett continues to hold large stakes in Kraft Heinz (KHC 0.27%) and Apple (AAPL 0.18%), and why these two stocks might be great buys to start the new year.
1. Kraft Heinz
Berkshire Hathaway has held a large stake in Kraft Heinz since 2015. Kraft Heinz benefits from strong brands and pricing power. These qualities helped keep sales growth up in a year when consumer spending was challenged by rising inflation. The consumer staples company’s shares trade at a cheap valuation, but an improving economy led by lowering inflation should also result in improving share prices.
Management has been doing the right things to prepare for long-term growth. Cost optimization helped improve Kraft’s profit margin from the low single digits three years ago to 11% in 2023. The higher margin allows management to direct more cash to debt reduction, marketing, technology, and dividend payments, things that should eventually lead to stronger growth and better returns for investors.
The new year may see more struggles to grow sales volumes, but lower inflation and supply chain costs should eventually turn into a profit bonanza for Kraft Heinz.
Now is a good time to consider buying while the stock is cheap before improving financial results send the shares higher. The stock trades at a low forward price-to-earnings ratio of 12.5. While investors wait for the payoff, they can collect a nice dividend, with the stock currently yielding an above-average 4.15%.
2. Apple
At Berkshire Hathaway’s 2023 shareholder meeting, Buffett called Apple a better business than any Berkshire owns. That’s quite a statement considering the vast number of businesses Buffett has acquired over the years. At the end of the third quarter, Berkshire held a $156 billion stake in Apple stock.
The value consumers place on their iPhones makes Apple more of a consumer brand than a technology company in Buffett’s view. Buffett commented at the meeting last year that people would sooner give up their $35,000 second car than their $1,500 iPhone.
Of course, what’s most important is that Apple is able to turn sales of these devices into massive profits. Apple generates a high profit margin of 25%, well above the 10% that is considered average.
Apple pays out a small share of its profits in dividends to shareholders, but Buffett places a higher value on the return Apple gets by reinvesting in services and new products to generate more sales every year. Apple generates a very high return on invested capital of 56%, which should lead to many more years of profitable growth and returns for shareholders.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
