While mostly tallying overall gains, the majority of Berkshire Hathaway Chairman and CEO Warren Buffett (Trades, Portfolio)’s largest portfolio holdings, which represent more than half of assets, have underperformed the year-to-date return of the S&P 500.
Versus a 1% increase in the index, Wells Fargo & Co. (WFC, Financial) has declined 10.7%, Bank of America Corp. (BAC, Financial) 5.9%, The Kraft Heinz Co. (KHC, Financial) 17.1% and Coca-Cola Co. (KO, Financial) 3.9%. Apple (AAPL, Financial), the stock that outperformed and his largest position, has gained 9.79%.
Despite Buffett’s preference for long-term investing, short-term swings in his portfolio will influence his bottom line reporting in the second quarter. Changes in Generally Accepted Accounting Principles (GAAP), which went into effect this year, require Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) to take into account unrealized gains and losses when it calculates earnings.
The first quarter illustrated the severe effect the revised rules can have. Berkshire reported $6.26 billion in unrealized investing losses, contributing to a net loss of $1.14 billion, compared to $205 million in unrealized investment gains and $4.1 billion in net earnings in the first quarter of 2017.
Buffett is considered one of the best investors in the world, swelling Berkshire’s stock price by 20.8% per year from 1965 to 2016.
For investors, this year’s downtick means several of the billionaire’s favorite stocks may trade at more compelling prices. Here are his top three positions:
Apple has risen 10% year to date, giving Buffett an estimated 28% return on the holding he and one of Berkshire’s portfolio managers started in early 2016.
Apple’s stock reached an all-time high of $193.98 in June but has since retreated to $184.93 per share as of Thursday morning.
Like Buffett, Apple has railed against investors taking a short-term view of the company. CEO Tim Cook said at a Fortune conference this week:
“You have to have a board and a CEO and a top-level management team that is willing to put aside the stock price because if you’re making a decision based on the short-term investors you’re going to be guaranteed to be making terrible decisions,” Cook said.
Most of the decisions the company has made have five, seven or ten-year time horizons, Cook said.
In June, Apple started its latest investment initiative: to invest around $1 billion in original content, joining with Oprah Winfrey to create its first programming to rival Netflix (NFLX) and Amazon (AMZN). The strategy could drive sustaining growth for the company, Daniel Ives, head of technology research at GNH Insights said in a research note.
“Taking a step back, with the AT&T/Time Warner deal now in the books and the Comcast/Disney battle royale for 21st Century Fox assets front and center, now is the time for Cupertino to pave the way for a standalone subscription service to launch by late 2019 in our estimation as the content strategy could represent a key growth vehicle for further monetizing the all-important software/services, which we believe is key to Apple’s growth prospects (and expanded multiple) over the coming years,” Ives said.
But some have worried that Apple may be running out of ideas for exciting new features for its flagship product, the iPhone. At its World Development Conference in June, the company announced no bombshells but said it will roll out improvements like a faster iOS 12, FaceTime with up to 32 people, personalized emoji and augmented reality.
Wells Fargo & Co.
Wells Fargo sank 10.9% year to date. Buffett has a gain since 2012 estimated around 75%.
Shares of Wells Fargo dropped almost 13% year to date and trade around $53.83 per share on Thursday.
The bank’s shares declined along with the financial sector, which slipped 5.5%. Changes in yields account for most of the volatility, according to Charles Schwab.
“Global political and trade concerns appear to have pushed investors into Treasuries as they look for perceived safe haven, resulting in lower longer-term yields and denting financial sector performance,” analyst Brad Sorensen said in a note last week.
Wells has also struggled under the weight of further misconduct accusations. A fresh ruling from the Securities and Exchange Commission on Monday said that the bank pushed customers to actively trade market-linked investments meant to be held to maturity. It also found that bank representatives did not “reasonably investigate or understand” the costs involved with the recommendations and that supervisors frequently defied prohibitions against the trades and approved them anyway.
Wells neither admitted nor denied the charges but agreed to pay $930,377 in “ill-gotten” gains, $178,064 in interest and a $4 million penalty for its actions.
Bank of America Corp.
Bank of America shed 3.52% year to date, giving Buffett a 19% gain since starting the holding in the third quarter of 2017. Shares traded at $28.79 Thursday.
It is also trading at 1.22 times book value, which is lower than 58% of the companies in the global banking industry. The low valuation has come despite the company posting record quarterly earnings of $6.9 billion, up from $5.3 billion a year earlier. Revenue also rose 9% to $9 billion.
Positive results were driven by an 8% increase in loans and 6% growth in deposits. The bank is also focused on investing in its mobile banking app, remodeling its financial centers and new hires to increase growth.
As with most banks, higher interest rates helped boost net interest income. For Bank of America, the measure rose $550 million, or 5%, to $11.6 billion.
For the second quarter, set for announcement July 16, analysts are expecting 61 cents in earnings per share, versus last quarter’s 62 cents.
