Don’t believe me? Just wait 45 days after the end of a quarter. The avalanche of media stories revolving around what billionaires buy and sell is legendary. I searched the words “Buffet Nov. 15, 2021” and got several pages of hits.
The weird thing is, Buffett’s not doing a whole lot of buying these days. Berkshire Hathaway’s portfolio was worth $310.7 billion at the end of September. However, the holding company sold $2 billion more in stocks than it bought during the quarter.
As a result, it was a net seller for all three quarters in 2021. I suspect we will find out in mid-February that Buffett was also a net seller in the fourth quarter.
That’s not to say you won’t find some gems hidden amongst the usual suspects. I’ve put together a list of 10 Warren Buffett stocks that belong on your watchlist in 2022. All the names on this list have at least a 10% free cash flow (FCF) margin for the trailing 12 months (TTM):
- Apple (NASDAQ:AAPL)
- American Express (NYSE:AXP)
- Coca-Cola (NYSE:KO)
- BYD (OTCMKTS:BYDDF)
- VeriSign (NASDAQ:VRSN)
- Charter Communications (NASDAQ:CHTR)
- Visa (NYSE:V)
- AbbVie (NYSE:ABBV)
- Restoration Hardware (NYSE:RH)
- Berkshire Hathaway
As I like to say: follow the free cash, and you generally can’t go wrong.
Warren Buffett Stocks: Apple (AAPL)
You can’t put together a list of quality Warren Buffett stocks without including Apple. Berkshire’s largest equity holding represents 45% of the portfolio’s $349 billion in assets.
Heck, Apple just became the first $3-trillion company. Even though it’s probably going to bounce above and below this symbolic mark for a while, it does speak to its hold on the technology sector.
As CNBC recently reported, “Apple tripled its valuation in under four years.”
I look back fondly at an article I wrote about Apple in October 2017. I suggested its stock could hit a $1 trillion market capitalization by Thanksgiving or Christmas Eve at the latest. Instead, it took a little longer than I expected, hitting 12 zeros in August 2018.
That means Apple’s push to $3 trillion was even faster than expected. Given it has $93 billion in TTM FCF, TTM revenue of $365.8 billion and an FCF margin of 25.4%, I don’t see how you can bet against it.
American Express (NYSE:AXP)
I can’t remember the last time I wrote about the financial services company best known for its credit card offerings. No matter; AXP stock is Buffett’s third-largest holding behind Apple and Bank of America (NYSE:BAC). It accounts for 7.4% of the Berkshire portfolio and represents almost a 20% interest in the company.
Buffett first invested in American Express in 1963, and he’s been a fan ever since. At the end of 2020, Berkshire had AXP stock at a book cost of $1.3 billion and a market value of $18.3 billion, good for an unrealized profit of $17.04 billion. At the end of 2021, Berkshire’s 151.6 million shares were worth $24.8 billion, up 35.3% for the year.
Analysts are mixed about its prospects. Of the 28 covering AXP stock, only 10 rate it as a buy or overweight. Their median target price is just under $192, providing about 11.8% upside as I write this in early January.
In the end, I like that it has an FCF margin of 28.8% (based on $11.6 billion in TTM FCF and $40.4 billion in TTM revenue.) It’s in the top three for a reason.
Warren Buffett Stocks: Coca-Cola (KO)
Coca-Cola and Berkshire are like apple pie and vanilla ice cream or peanut butter and jelly. They’re just meant to be together. If Buffett ever pulled an IBM (NYSE:IBM) with Coke, the share price would crater. The man probably puts the company’s beverages on his cereal.
Berkshire’s 400 million shares represent a 9.3% stake in the Atlanta-based company and 7% of its overall portfolio. It paid $1.3 billion for these shares. As I write this, they’re worth a cool $24.2 billion.
On Nov. 1, 2021, Coca-Cola announced it would pay $5.6 billion to acquire the 85% of BodyArmor it doesn’t already own. It bought an initial 15% stake back in 2018. The sports drink company wants to become the biggest in the world. With Coke’s help, it very well could.
As Coke continues to experiment in the alcoholic drinks market, it’s an exciting time for the beverage giant. However, I doubt Buffett wants to give up almost $700 million in annual dividends from the company.
KO stock is an excellent defensive play to own in 2022.
Despite sitting in Buffett’s top 10 holdings, BYD is likely the least-well-known stock in the bunch. And that’s okay. The story of how Buffett first got involved with the China-based company will eventually get out to all investors.
In March 2021, I highlighted seven of Warren Buffett’s best stock picks of the past decade. BYD was one of them.
“Buffett bought 225 million shares of BYD in 2008 at approximately 8 Hong Kong dollars per share. As I write this, the shares are trading at 216.20 Hong Kong dollars per share, a compound annual growth rate of 28.9%. In U.S. dollars, Berkshire made a $225 million investment. That investment is now worth $6.3 billion,” I wrote last March.
Since then, the stock has appreciated by 17% over the past 10 months.
BYD currently has a TTM FCF margin of 12.9%. That might not seem like much, but it’s pretty high given its push into electric vehicles (EVs). As EVs become more mainstream with automobile buyers, investors can expect BYD’s free cash to grow exponentially.
Warren Buffett Stocks: VeriSign (VRSN)
If there’s a position in Berkshire’s portfolio that has snuck up on me, VeriSign is it.
The provider of domain name registry services and internet infrastructure flies under the radar for most investors. It provides registration services for top-level domains. Without them, your e-commerce business isn’t going very far.
Verisign operates a very boring but necessary business, enabling it to generate huge free cash. Its TTM FCF is $750 million while its TTM revenue is $1.3 billion, good for an FCF margin of 57.3%. It converts 123% of its net income into free cash. Any time that number is more than 100, a business is doing well.
The company’s Q3 2021 results were released on Oct. 28, 2021. Highlights included a 5.1% increase in revenue to $334 million, while its operating income increased 7.1% year-over-year (YOY) to $221.3 million.
At the end of September, Verisign had $1.2 billion in cash and cash equivalents on its balance sheet. In addition, its long-term debt was a very low $2.2 billion, or 8% of its market cap.
When it comes to VRSN stock, slow and steady wins the race.
Charter Communications (CHTR)
Berkshire owns 2.3% of cable company Charter, and its position accounts for 0.8% of the portfolio. Between Dec. 31, 2020 and Sep. 30, 2021, Berkshire’s position in Charter shrunk by a little more than one million shares, or 19%.
Berkshire first acquired a position in Charter in August 2014. According to the holding company’s 2020 annual report, it paid $904 million, or $173.40 per share, for its position. Charter currently trades above $640.
I think it’s fair to say Buffett, et al. took some profits in 2021. However, in 2022 and beyond, the company is positioned nicely to continue adding residential and commercial internet customers as well as new additions from 5G. Moreover, should the omicron variant of Covid-19 take hold, Charter’s internet numbers will likely accelerate beyond expectations.
Warren Buffett Stocks: Visa (V)
Berkshire has positions in both Visa and Mastercard (NYSE:MA). Visa is the larger of the two, valued at $2.1 billion, or 0.6% of the holding company’s equity portfolio. Its Mastercard position is $1.6 billion, good for 0.5% of the portfolio.
I’m not sure why Buffett feels the need to own both businesses. While I like Mastercard — I recommended it in February 2020 — I’ve put Visa on this list to watch because it’s the more significant position of the two. That suggests a slightly higher commitment from the Berkshire brain trust.
A total of 37 analysts cover Visa. 34 of them rate the payment processor a buy or overweight. None rate it a sell. The median target price is $275.50, well above where it’s currently trading.
I’d like to see more fintech disruptors in Berkshire’s holdings — and in the future, you will. In December, Buffett-backed Nu Holdings (NYSE:NU), a large Brazilian financial technology (fintech) company, went public at $9. Look for it on the February update to Berkshire’s holdings.
Some portfolio managers might be concerned about Visa’s ability to compete with the disruptors. I’m not. It’s an excellent long-term play.
The drug company had a good year in the markets. It gained more than 26% in 2021, with a total return of more than 30% if you include dividends. ABBV stock finishing the year strong, generating a three-month total return of 24% through Jan. 4.
Earlier this week, the company announced that the U.S. Food and Drug Administration (FDA) granted Breakthrough Therapy Designation (BTD) for telisotuzumab vedotin (Teliso-V), its treatment for previously treated non-small-cell lung cancer.
In a press release, Mohamed Zaki, M.D., Ph.D., Vice President and Global Head of Oncology Clinical Development at AbbVie, said:
“Patients with non-small cell lung cancer have a high unmet need and Teliso-V has the potential to provide them with an additional treatment option to manage their disease … Today’s announcement marks an important step in our mission to advance new oncology treatments across tumor types to improve standards of care for patients with cancer.”
AbbVie is coming off a solid third quarter with an 11.3% increase in sales and a 17.7% increase in adjusted earnings per share (EPS).
Its oncology revenue currently accounts for approximately 13% of its overall sales. This latest announcement should help bump that percentage higher. The 4.2% dividend yield also doesn’t hurt.
Warren Buffett Stocks: Restoration Hardware (RH)
In April 2018, I included the furniture and design business in my “10 Stocks to Buy for the Perfect All-Cap Portfolio” list. RH stock is up more than 500% since then. That compares to about 77% for the S&P 500 over the same period.
I’m not trying to flatter myself. I just was very comfortable with the retailer’s business model.
“The company announced $1.05 a share in Q4 2017 adjusted earnings, 46 cents higher than analysts were expecting. The retailer is doing better as a result of its move to a club membership where customers pay $100 per year to get 25% off everything sold in the store including interior design services,” I wrote in 2018.
“The RH Members Program allows our customers to shop for what they want, when they want, and receive the greatest value, which has resulted in orders and sales being more evenly distributed throughout the year as opposed to the peaks and valleys of orders and sales we experienced under the prior promotional model. For the year ended January 30, 2021, our members drove approximately 97% of sales in our core RH business, and we had approximately 434,000 members at year end.”
An investment in RH remains a no-brainer. Berkshire thinks so; it owns 8.4% of the company.
Berkshire Hathaway (BRK-A, BRK-B)
It would be silly to assemble a list of Warren Buffett stocks to watch and not include the parent company. In 2021, BRK-B gained 29%, 210 basis points higher than the index.
One way for Berkshire to prime the pump is to use some of its cash — $149.2 billion at the end of the third quarter — to buy back its shares. In the first nine months of 2021, it repurchased $20.2 billion of its shares, 29% higher than a year earlier.
According to page 20 of its Q3 2021 10-Q, it bought back 11,285 Class A shares and 59.37 million Class B shares. Each Class A share is convertible into 1,500 Class B shares. As a result, Berkshire paid $264.78 for each Class B shares it repurchased through Sep. 30, 2021. That’s an 18.4% return on its investment, far superior to what the cash would earn sitting in a guaranteed investment.
For me, I’ve always felt you’ll never know the actual value of Berkshire’s assets until they’re all methodically and patiently sold to the highest bidders. I’m confident it will be a lot more than its current BRK-A stock price of $314.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.