Warren Buffett’s Berkshire Hathaway Inc. has over $100 billion under management. While Berkshire Hathaway has 40-plus holdings, the top five stocks make up 68% of the financial guru’s portfolio. If you’re thinking of trying to duplicate Buffett’s success, you have to take a look at the top five Warren Buffett stocks to watch in 2015.
1. Wells Fargo & Company (NYSE/WFC)
The top Warren Buffett stock is a retail-focused bank. About 23% of Buffett’s portfolio is invested in Wells Fargo & Company. With more than 70 million customers and over 8,700 locations across the U.S., Wells Fargo is a top banking institution nationally. The bank commands the strongest retail banking business in the U.S., coming in as the number one mortgage originator and small business lender, and top auto lender nationally. To support its impressive loan portfolio, Wells Fargo has over $1.2 trillion in deposits. (Source: Wells Fargo, “Credit Suisse Financial Services Forum,” February 10, 2015.)
While low interest rates have suppressed net interest margins (the difference between what a bank earns on its assets and pays out on deposits), the pending interest rate hike by the Fed will be a net positive for the bank. Also, the continued recovery in the U.S. economy is sure to support its credit cards and wealth management businesses in 2015.
2. The Coca-Cola Company (NYSE/KO)
The Coca-Cola Company makes up 15% of Buffett’s total holdings. The company owns four of the top five non-alcoholic sparkling beverage brands globally: “Coca-Cola,” “Diet Coke,” “Fanta,” and “Sprite.” (Source: The Coca-Cola Company annual report, February 23, 2015.)
Total revenues fell by $865 million in 2014, from a total of $46.8 billion in 2013, even though volume in Eurasia & Africa and Asia-Pacific were up three percent and five percent, respectively. The steady dividend-paying business is expected to grow sales volume by four percent through 2014, simultaneously increase prices, and continue to market its other products, including “Simply Orange Juice” and “vitaminwater.”
3. American Express Company (NYSE/AXP)
Nearly 13% of Warren Buffett’s portfolio is allocated towards American Express Company. The branding of American Express targets the affluent consumer and in turn merchants who are willing to pay higher fees to accept “AmEx” cards. These fees drive the American Express brand and perceived differentiator, which is founded on exceptional service and rewards to its cardholders.
The recent end of a 16-year exclusive partnership with Costco will deal a serious blow to American Express, affecting roughly one in 10 AmEx cards. However, the Costco relationship is one of the numerous co-branded efforts that American Express maintains. American Express can also rely on high annual fees charged to its cardholders (for example, the $450.00 charged annually for “Platinum” cards) to buffer revenues. The premium position of AmEx cards and 26% share of the U.S. credit card market will propel the company forward in 2015. (Source: American Express web site, March 25, 2015.)
4. International Business Machines Corporation (NYSE/IBM)
Another top Warren Buffett stock is International Business Machines Corporation (IBM). IBM, a tech giant with $93.0 billion in revenue and $12.0 billion in net income, constitutes another 11% of Warren Buffett’s holdings.
IBM is ubiquitous in the business world, working with 90% of the world’s top banks, nine of the top 10 oil and gas companies, 40 of the top 50 retailers, and 92 of the top 100 healthcare organizations. (Source: IBM Annual Report, last accessed April 6, 2015.)
IBM successfully leverages its scale and evolving expertise in an industry that is characterized by cycles of innovation, followed by commoditization, dropping prices, and increased competition. For example, hardware used to make up the majority of IBM sales, but today the systems and technology segment makes up just 10% of sales. The remainder of revenues is generated by IT services, businesses services, and software sales. (Source: Ibid.)
In 2015, IBM is continuing to divest non-core businesses, like the commoditized server business, and is moving forward with investment into data, analytics, and the cloud. A leaner, more focused IBM is set to grow earnings at 34% in 2015. (Source:Wall Street Journal web site, last accessed April 6, 2015.)
5. Wal-Mart Stores Inc. (NYSE/WMT)
At around five percent of the portfolio, Wal-Mart rounds out our list of the top five Warren Buffett stocks. A darling for Buffett, Wal-Mart’s shares have risen 67% over the last five years and its dividends paid to common shareholders have risen 17%, on average, over the same five years. That’s a great return, but it looks like the Wal-Mart machine is slowing; some say it’s even breaking down.
In February 2015, CEO Doug McMillon increased the minimum wage for Wal-Mart employees to $9.00 per hour, above the federal minimum of $7.25. Finally, employees will get paid enough to shop at their own store. And this has been the problem: store managers who can only control costs and underpaid employees servicing a growing number of dissatisfied shoppers. No wonder about 44% of Wal-Mart’s hourly staff turns over each year. (Source: Ritholtz, B., “Wal-Mart’s Minimum Wage Breakdown,” Bloomberg View, February 23, 2015.) Low wages stalled the growth engine.
Same-stores sales, a great gauge of growth, declined throughout 2014 and were flat in 2013. That’s no expansion in over two years. (Source: Wal-Mart Stores Inc. web site, last accessed April 6, 2015.) The new head of Wal-Mart U.S., Greg Foran, described stores as not clean enough, with poor inventory management, food that isn’t fresh enough, and uneager employees. (Source: MarketWat
With earnings expected to be flat for 2015 and 2016, let’s see if these top five Warren Buffett stocks can surprise investors.