Warren Buffett is a legendary investor with countless aphorisms to his name. My favourite is: “Time is the friend of the wonderful company, the enemy of the mediocre.” In that spirit, let’s explore Warren Buffett’s portfolio and see if his top two stock holdings are good long-term buys for me.  

Apple 

According to Berkshire Hathaway‘s (NYSE: BRK-A) SEC filing, Warren Buffett’s largest holding is Apple (NASDAQ: AAPL). Via Berkshire, Buffett owns 5.55% of the US tech giant’s total shares — a whopping 43% of his equity portfolio. Buffett began building a stake in Apple in 2016 and in his annual letter to Berkshire shareholders he praised CEO Tim Cook for Apple’s share repurchase strategy. 

One factor behind Buffett’s bullishness is the iPhone maker’s competitive advantage. Apple’s ecosystem is created by establishing market standards, encouraging developers to build apps tailored specifically to Apple smartphones. This produces a virtuous cycle, making Apple products indispensable. 

Nonetheless, Apple supplier Foxconn recently suspended its Shenzhen production due to a Covid-19 outbreak in the region. The Apple share price is still high for me, despite being down almost 14% on a three-month basis. Currently, I’m reluctant to deploy a significant amount of my cash reserves buying Apple in one go.

Indeed, Warren Buffett bought his position at an average cost of a quarter of today’s price. I will be buying steadily over the coming months to capitalise on any further dips in Apple’s share price. 

Bank of America 

At over 13% of Berkshire’s holdings, Bank of America (NYSE: BAC) is the second-largest constituent of Warren Buffett’s portfolio. The stock’s P/E ratio of 11.63 fits with Buffett’s value investing philosophy. Shareholders also benefit from a handy dividend yield of over 2%.

The Federal Reserve is tipped to hike interest rates in 2022. Bank of America should benefit from these macroeconomic conditions. Moreover, with a total net income of $32m for 2021, the bank is well placed to build on strong fundamentals this financial year. 

The stock currently sits almost 20% below its 52-week high in mid-February. Furthermore, the US economy is flashing recession warning signs. Bank of America shares could face further pain, given the bank services around 67 million consumer and small business clients stateside.

Despite these risks, I see Bank of America’s current share price as an attractive entry point to add this Warren Buffett stock to my portfolio. 

Another way to invest like Warren Buffett 

Perhaps the easiest way to mirror Warren Buffett’s investments is buying Berkshire Hathaway shares. The company’s compounded annual gain of 3,641,613% dwarfs the 30,209% gain for the S&P 500 from 1964 to 2021. For me, Berkshire stock carries some of the diversification benefits of an index fund while providing an opportunity to beat the market. 

Investors may worry about Buffett’s age at 91 while Vice-Chairman, Charlie Munger, is 97. Berkshire Hathaway’s share price performance without the duo at the helm is untested. This doesn’t dissuade me from owning the stock, however. I see the potential for future leadership to emulate Buffett’s investing approach beyond his lifetime. 

Berkshire currently has over $145bn in cash on its balance sheet and insurance is a large part of its business. A useful reminder for me that, with share valuations riding high, cash is king for scooping up bargains in the event of a stock market crash. 

The post 2 stocks make up over 50% of Warren Buffett’s portfolio. Should I buy them? appeared first on The Twelfth Magpie.

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Charlie Carman owns shares in Berkshire Hathaway. Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Recent results

Apple’s latest annual results clearly demonstrate why it’s the most valuable company in the world. Indeed, net sales reached $365bn, a 33% increase from last year. The rise in operating income was even more impressive, nearly reaching $109bn for the year. This is a 64% increase year-on-year. Therefore, there are clearly signs that growth is continuing at a rapid pace.

Such great results have also allowed Apple to return large amounts of money to shareholders through dividends and share buybacks. As the dividend only yields 0.5%, the main focus is on the share buyback programme. In fact, in the year ending September 25, Apple had made around $86bn of share repurchases, 18.5% more than the previous year. This has the effect of increasing the ownership percentage of each individual shareholder and has therefore been a key reason why Apple stock has climbed so much. There also seems no reason why this share buyback programme will stop, meaning that the share price may be able to climb further.

A valuation perspective

Despite these excellent results, there is no doubt that Apple stock is still expensive. This can be demonstrated by several different valuation metrics. For one, it trades on a price-to-sales ratio of around 8. By comparison, Amazon, another tech company that has seen incredible growth, trades at a price-to-sales ratio of under 4. Apple also has a price-to-book ratio of around 40, while Amazon trades at a price-to-book ratio of just 14. This is partly because Apple has issued a lot of debt for growth over the past few years and has used cash to buy back shares. While this is not necessarily bad, it does show that Apple stock certainly has a premium valuation in comparison to other companies.

Even so, from a price-to-earnings perspective, the current Apple stock valuation looks slightly more reasonable. In fact, in the most recent results, annual earnings-per-share came to $5.67, giving Apple a P/E ratio of around 30. This is around the average P/E ratio for the S&P 500. Considering the incredible growth of Apple, it may, therefore, not be as expensive as it first seems.

What am I doing with Apple stock?

Overall, there is no doubt that Apple trades at a premium valuation, albeit that its P/E ratio is more reasonable. But to buy the best companies in the world, it is often necessary to pay this premium. The company also has several growth plans for the next few years, including the launch of an augmented reality and virtual reality headset and a possible entry into the electric vehicle market. Therefore, I think growth is only going to continue, and I’m willing to pay a premium for the shares as a result. This is a stock I’m very tempted to buy.

The post Is Apple stock now far too overvalued? appeared first on The Twelfth Magpie.

More reading

• 7 easy Warren Buffett tips to retire richer
• Here’s how saving £3 a day could lead to an £11,925 yearly passive income

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.