Warren Buffett's Berkshire Hathaway disclosed a huge sale on its massive Apple position in the second quarter -- a position that was reported as $174 billion at the end of 2023 shrank down to $85 billion after Berkshire sold roughly half its Apple shares last quarter.
Whether Buffett is selling out completely or simply reducing the size of the stake remains to be seen. The important thing is that the greatest investor of all time now has a lot more cash to reinvest in something more attractive.
Three Fool.com contributors weighed in with their suggestions on stocks Buffett might want to consider. Here's why they believe Amazon(NASDAQ: AMZN), LVMH Moet Hennessy Louis Vuitton(OTC: LVMHF), and Williams-Sonoma(NYSE: WSM) would fit in with Berkshire's previous stock holdings and businesses it already owns.
Buffett should double down on Berkshire's Amazon stake
John Ballard (Amazon): Amazon would make an excellent candidate to park some of Berkshire's billions for a couple of important reasons.
Former Berkshire vice chairman Charle Munger, who died last year, previously called Amazon a "phenomenon of nature." He admired the talents of founder and executive chair Jeff Bezos to build Amazon's brand amid intense competition in the retail industry. Munger also believed over five years ago that Amazon may have a long runway of growth ahead.
Buffett's preferred investment has always been a business with a durable competitive advantage, and of course, Berkshire owns several retail businesses, including Nebraska Furniture Mart, See's Candies, and Pampered Chef, that have been successful in a cutthroat industry. Amazon certainly has a wide economic moat to protect itself from the pressure of competitors. It enjoys tremendous customer loyalty and has one of the strongest brands around.
Most importantly, Amazon has a significant infrastructure advantage in e-commerce. It has mapped the entire U.S., with large fulfillment centers that stock an unbeatable selection of items at competitive prices. In 2023, this allowed the company to deliver over 7 billion items within one day to millions of customers.
Amazon also has a technological lead over its retail competitors. It has invested in artificial intelligence (AI) for years, which powers the product recommendations on its website. It's also paving the way for strong growth in its industry-leading cloud enterprise business Amazon Web Services, a $98 billion revenue-generating business that is growing at double-digit rates.
Finally, Berkshire already owns 10 million shares of Amazon stock. One of Buffett's investing deputies purchased a small stake on behalf of Berkshire in 2019. It wouldn't be a stretch to see Buffett add to that stake at some point.
Amazon is a more profitable business than the average discount retailer. It generated $48 billion in free cash flow on $604 billion of revenue over the last year. With the company's profitability continuing to grow, the stock can deliver satisfactory returns for patient investors like Warren Buffett.
A perfect fit for Buffett
Jeremy Bowman (LVMH): Buffett has long been a fan of big-brand consumer stocks. Coca-Cola, for example, is Berkshire's longest-held stock, and Apple is still his biggest holding, despite having dumped roughly half of its stake this year.
However, Buffett has typically avoided luxury stocks like LVMH, even though they have many of the same assets as companies like Apple and Coca-Cola, including a set of well-known brands that command a higher price point, a track record of success, and a smart management team.
Buffett is even friends with Bernard Arnault, the founder and CEO of LVMH, and Buffett sent him a letter asking him to reconsider his planned retirement at age 80.
As for the stock, LVMH is fresh off a clever partnership at the Olympics where it sponsored everything from medal trays to wines and spirits under its Moet Hennessy brands.
Buffett can also appreciate LVMH's massive conglomerate model, which is the largest in the luxury sector, containing brands such as Tiffany, Sephora, Tag Heuer, and Dom Perignon.
In a challenging time for consumer discretionary goods, including luxury, LVMH has continued to post strong profits with an operating margin of 25.6% in the first half of the year, well above pre-COVID levels, translating into 10.7 billion euros ($12 billion) in operating profit.
The stock has also pulled back on that slowing growth, down 21% from its 52-week peak and trading at a price-to-earnings ratio of 24.6.
Growth is likely to improve as inflation and interest rates continue to fall around the world, and the stock would fit well in Berkshire's portfolio and bring a new category to the company. It's a good buy for Buffett and any other long-term investors looking to own a proven winner.
I'm surprised Buffett hasn't bought this stock until now
Jennifer Saibil (Williams-Sonoma): Investors love to dissect Warren Buffett's stock picks, but Berkshire Hathaway also wholly owns plenty of whole businesses, including large companies with names you know like Duracell batteries, Dairy Queen restaurants, Geico insurance, and Brooks sports equipment.
What you might not know is that Berkshire Hathaway owns several furniture businesses, making it one of the largest furniture companies in the country. Berkshire's furniture-related investments are also lesser known. The conglomerate took a stake in high-end furniture retailer RH in 2019 but has since sold it.
Upscale furniture company Williams-Sonoma might do well as a Berkshire investment because it operates much like your typical Buffett stock, and I wouldn't be surprised to see it end up in his portfolio.
Williams-Sonoma is a leading housewares company with a resilient consumer base. Although it's feeling the pressure of inflation, it runs a tight ship and still manages to generate strong margins and profits. Adjusted gross margin (which admittedly included a tax benefit this quarter) was 45.4% in the 2024 fiscal first quarter (ended April 30), a 6.8% increase year over year. Operating margin came in at 19.2%, up from 16.6% last year.
Those are excellent margins under any circumstances for a retailer, and even more so when sales are down and inflation is high. Management raised its full-year outlook for operating margin, and it reiterated long-term guidance of revenue increases in the mid-to-high single digits and operating margin in the mid-to-high teens. That's efficient use of capital, which is something else that Buffett looks for in a business. It also generates consistently strong free cash flow and has no debt.
On top of that, Williams-Sonoma pays a growing dividend with a slightly above-average yield of 1.4%, and it returns value to shareholders through an ample share repurchase program.
Williams-Sonoma stock trades at a reasonable valuation and its forecasted future earnings suggest it could be undervalued. It's not as cheap as it was last year, but at 17 times trailing-12-month earnings, it's still much cheaper than the S&P 500 average of 27.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has positions in Apple. Jeremy Bowman has positions in Amazon and RH. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, and Williams-Sonoma. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.
