Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, is known for his long-term investing approach and focus on high-quality companies.
Two of his largest holdings, Apple and Bank of America, make up over $45 billion of Berkshire’s massive $350 billion equity portfolio.
Wall Street analysts see significant upside potential in both stocks over the next 12 months, with expected returns of over 20%.
Apple – A Core Holding Set to Outperform
With a position currently worth around $125 billion, Apple is by far the largest holding in Berkshire’s portfolio, making up over 35% of the total equities.
Buffett has sang Apple’s praises for years, impressed by its customer loyalty, strong brand, and ability to consistently roll out innovative products that maintain premium pricing power.
Berkshire has been building its Apple stake over the past several years, taking advantage of any pullbacks in the stock to add to its position. This strategy has paid off handsomely, with Apple up over 600% since Berkshire initiated its investment in early 2016.
Going forward, analysts see more gains ahead for Apple:
- Strong iPhone 14 demand expected – Early data indicates strong customer interest and pre-orders for the recently released iPhone 14 models. Apple is also benefiting from consumers upgrading older iPhones.
- Growth in services – Apple’s fast-growing services segment, which includes apps, music, iCloud, AppleCare, and more, is becoming an increasingly important part of the company’s overall profits. Services revenue has steadily risen to over 20% of total sales.
- Potential new products – Rumors suggest Apple is preparing to release its first augmented/virtual reality headset as early as next year. This could open up an entirely new revenue stream in the years ahead. An Apple Car also may be in the works.
Wall Street analysts have an average 12-month price target of $189 on Apple stock, representing 25% upside from current levels near $150. With Apple continuing to fire on all cylinders, it’s easy to see why Buffett views it as a long-term core holding.
Bank of America – Buffett’s Banking Bet
Berkshire has been buying shares of Bank of America for over a decade, making it Buffett’s second largest equity position at around $33 billion. He has repeatedly expressed confidence in BofA’s management team led by CEO Brian Moynihan.
In 2022, Berkshire exercised warrants to purchase BofA stock dating back to Berkshire’s investment in preferred shares in Bank of America during the financial crisis in 2011. This increased Berkshire’s ownership stake to over 12% of BofA’s common shares outstanding.
Bank of America is benefitting from rising interest rates in 2022, which allow it to earn more net interest income on loans. Other positives for BofA:
- Cost cutting – Management has reduced expenses through technology investments and closing redundant branches. This has improved profitability.
- Solid balance sheet – BofA maintains strong capital reserves and healthy asset quality. The bank shrugs off concerns about a recession impacting performance.
- Investment banking fees – BofA’s mergers and acquisitions advisory operations have thrived amidst robust dealmaking activity over the past several years.
Analysts have an average share price target of $41 on Bank of America stock, implying 23% upside from current levels around $33. BofA also pays a competitive dividend yielding 2.6%, offering steady income in addition to attractive capital gains potential.
Why Buffett Loves These Stocks
It’s easy to see why Apple and Bank of America make up such a significant chunk of Berkshire Hathaway’s portfolio. Both companies have durable competitive advantages, strong brands, and are leaders in their respective industries.
Importantly, both generate tons of excess cash flow. Apple produced operating cash flow of nearly $120 billion in 2022, while Bank of America produced over $35 billion. Buffett loves companies that are cash machines, since they have capital to reinvest and return to shareholders.
The Oracle of Omaha also favors companies with simple, easy-to-understand businesses that aren’t heavily reliant on a growing economy to thrive. Apple and BofA exhibit these traits.
Finally, Buffett stays within his circle of competence by focusing on the technology and banking sectors where he has developed expertise over his decades-long investing career.
Outlook for Apple and BofA
While broader market volatility could impact Apple and Bank of America stocks in the shorter term, the long-term outlook remains bright for both companies. Demand for iPhones and other Apple products is expected to remain healthy globally, supporting steady revenue and earnings growth.
Similarly, higher interest rates and BofA’s strong market share in the U.S. should allow it to grow profits at a steady clip. Its cost-cutting initiatives also boost margins.
BofA and Apple stocks aren’t cheap, trading at 11x and 25x forward earnings, respectively. However, for quality companies with strong growth runways, Buffett doesn’t mind paying up.
With a proven track record of identifying winners, investors can feel confident that Apple and Bank of America will continue to be core Berkshire holdings capable of generating market-beating returns over the next decade and beyond.