Warren Buffett is arguably the most famous investor on the planet. Consistently outpacing the broader markets, Buffett’s portfolio is closely followed by Wall Street. Berkshire Hathaway, the company owned by Buffett, holds over 40 stocks in its portfolio. Here, we look at three of these holdings that I believe should help investors derive outsized gains while diversifying their portfolios.
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Warren Buffett stock #1
Valued at US$393 billion by market cap, Mastercard (NYSE: MA) has returned close to 10,000% since its IPO (initial public offering) in 2006 after adjusting for dividends. Despite its massive size, Mastercard is forecast to grow revenue from US$22.2 billion in 2022 to US$28.1 billion in 2024. Priced at 29 times forward earnings, the payments network giant is estimated to expand adjusted earnings by 21% annually in the next five years.
Mastercard processed transactions worth US$8.7 trillion in the last four quarters, making it the second-largest payment network in the world after Visa. Over the years, Mastercard has successfully built a network of merchants and banking partners to process transactions for debit and credit card holders.
Armed with a wide economic moat, Mastercard is well positioned to benefit from the worldwide shift toward digital payments. An asset-light model allows the fintech heavyweight to benefit from a high operating margin of almost 60%.
Mastercard pays shareholders an annual dividend of US$2.64 per share, translating to a forward yield of 0.64%. However, these payouts have risen by 30% annually in the last 16 years, raising your effective yield significantly in the process.
Warren Buffett stock #2
An energy behemoth, Occidental Petroleum (NYSE: OXY) is valued at US$53 billion by market cap, accounting for 4.1% of Berkshire’s portfolio. Berkshire first provided roughly US$10 billion in capital to Occidental Petroleum to fund the acquisition of Anadarko in 2019. Berkshire had then purchased 100,000 preferred shares of Occidental that pay annual dividends of 8%.
Occidental continues to target accretive acquisitions and recently announced a US$12 billion bid for CrownRock. The acquisition will majorly be funded by debt, making investors nervous given rising interest rates.
However, according to Occidental, the acquisition will generate incremental cash flows of US$1 billion if oil prices remain over US$70 per barrel.
Priced at 13.2 times forward earnings, OXY stock trades at a discount of 15% to consensus price target estimates.
Warren Buffett stock #3
The final Warren Buffett stock on my list is DR Horton (NYSE: DHI), one of the largest homebuilders in the world. Despite headwinds such as rising interest rates and inflation, DHI stock has returned 70% in the last year and is up 650% since January 2014.
While interest rates are likely to move lower, there is also an acute housing crisis in the U.S., which should act as a key driver for DR Horton’s top-line growth. According to a Bank of America report, the U.S. needs four million houses to meet total demand.
With a presence in 33 states south of the border, DHI stock is priced at 10.2 times forward earnings, which is quite cheap. Moreover, the company also pays shareholders an annual dividend of US$1.20 per share, indicating a yield of 0.80%. But these payouts have more than tripled in the last 18 years.
