Berkshire Hathaway Inc. BRK.B Chairman and CEO Warren Buffett is a great role model if you want to be an astute investor. He has accumulated a fortune of more than $87 billion over his career after getting into the investing game pretty early.
Buffett’s investing style is quite simple. He uses a more qualitative approach in selecting companies that have stood the test of time. These companies have solid business models and have the ability to record significant growth. In other words, these companies have good earnings potential and are not concerned whether the market will recognize its worth. By the way, they also generate plenty of cash and provide dividends, which are indicators of a strong and sustainable business.
Let us, thus, focus on the Oracle of Omaha’s favored companies that are likely to make the most of the fourth quarter. Most of these companies belong to sectors such as financials, technology, communication services and airlines.
Why Not Berkshire Hathaway?
Way back in 1962, Warren Buffett began acquiring stakes in Berkshire Hathaway after he figured a pattern in the price direction of its stock whenever the company closed a mill. Buffett acknowledged that the textile mill was losing money, which led him to expand into the insurance industry. The insurance business definitely paid off as evident from Berkshire’s staggering return of more than 800% since inception.
To top it, the insurance business should do well in the current fourth quarter. After all, policymakers under Chairman Jerome Powell unanimously decided to hike the federal funds rate by 25 basis points to 2-2.25% after the end of the two-day meet on Sep 26. The Fed has also signaled another hike in December and three more next year (read more: Fed Issues Third Rate Hike of 2018: Top 5 Gainers).
Needless to say, that insurer derives its investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in interest rates. This enables insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.
Berkshire currently has a Zacks Rank #2 (Buy). In the last 60 days, three earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 12.5% in the same period. The company’s expected earnings growth rate for the current year is 68.9% compared with the Insurance - Property and Casualty industry’s expected rally of 22.9%. Berkshire has already outperformed the broader industry so far this year (+8.4% vs +6.4%).
Why Buffett Keeps Buying Apple?
Buffett already owns more than 110 million shares of Apple Inc. AAPL. Thus, Apple now represents more than 20% of Berkshire’s portfolio. But why does Buffett keep increasing his stake in Apple? This is because he believes Apple is a phenomenal company that is driven by innovation and key initiatives taken by the founder and former CEO Steve Jobs. Buffett described Apple as a “very, very special product, which has an enormously widespread ecosystem, and the product is extremely sticky.”
The iPhone is the most important product of Apple as its sales represent more than half of the total revenues. But what has changed in the recent years is its sales composition. Per Magellan Asset Management, 45% of iPhone sales were to new users going back to 2012. But now, heading into the fourth quarter, 20% of iPhone sales are to new users, while 80% are sold as replacement handsets to existing users. This means there will more steady earnings in the form of recurring earnings, rather than one-off handset sales. This has again prompted the legendary investor to place his bet on the Cupertino, CA-based tech giant.
Apple, recently, became the first U.S. company with a market cap of more than $1 trillion and has a Zacks Rank #2. In the last 60 days, three earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings increased 0.2% in the same period. The company’s expected earnings growth rate for the current year is 27.7% compared with the Computer - Mini Computers industry’s expected rally of 25%. Apple has at present outdone the broader industry on a year-to-date basis (+34.3% vs +33.1%).
Buffett is Delving Deeper Into the Telecom Space
After purchasing shares of big names from the telecommunication space including Verizon Communications Inc. VZ, DISH Network Corporation DISH and Charter Communications, Inc. CHTR to name a few, he has taken the global plunge and bought Liberty Latin America Ltd. LILA. He now owns more than $1 billion worth of the broadband Internet, fixed-line telephone and mobile and other communications service provider’s total equity.
Buffett has shown interest in the telecommunication space, something which he avoided in the past. After all, historically, the broader tech sector has been a winner in the fourth quarter. In the last two decades, tech rose more than two-third of the times in the fourth quarter per market pundits.
Liberty Latin America currently has a Zacks Rank #2. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings soared 38% in the same period. The company’s expected earnings growth rate for the next quarter is 90.5% while the Wireless National industry is expected to tank 78.3%. Liberty Latin America has already outperformed the broader industry so far this year (+4.8% vs -3.9%).
Buffett is Hungry for Airlines
Time and again, Buffett has shown considerable interest in buying stakes in airlines. In fact, Buffett once said that he “wouldn't rule out owning an entire airline.” He already owns stakes in large airlines such as American Airlines Group Inc. AAL, Southwest Airlines Co. LUV and Delta Air Lines, Inc. DAL. These airlines are currently charging more for checked bags and those fees should certainly boost their bottom lines in the fourth quarter. These three legacy players have announced increased prices for first and second checked bags.
But, the one among them that stands out is Southwest Airlines. After all, it carries a Zacks Rank #2. In the last 60 days, four earnings estimates moved up, while one moved down for the current year. The Zacks Consensus Estimate for earnings improved 0.5% in the same period. The company’s expected earnings growth rate for the current year is 20% in contrast to the Transportation - Airline industry’s expected decline of 7.2%. Southwest Airlines has already outperformed the broader industry in the last one year period (+4.8% vs -11.1%).