2 Warren Buffett stocks you wish you had bought on the downside

Even at 91, Warren Buffett is widely regarded as one of the greatest investors in the world. During his 55-year continuous tenure as his Berkshire Hathaway (BRK.A 1.39%) (BRK.B 1.48%) investment company, it delivered an average annual return of 20%, twice the return of the benchmark S&P500 stock index.

Buffett’s investment philosophy is surprisingly simple: focus on companies that make consistent profits, return money to their shareholders, and have diverse sources of income. But above all, he buys these companies with the intention of keeping them for the very long term.

Here are two of Berkshire’s top picks that have consistently done the trick over their respective decades-long histories and will likely continue to do so.

The case of Amazon

Amazon (AMZN 2.64%) went public in 1997, just when the internet technology boom was really heating up. Warren Buffett tends to shy away from companies he doesn’t understand very well, so he avoided Amazon stocks, although he recognizes the company for its innovation. It has returned over 122,000% since its IPO. Although Berkshire made a billion-dollar purchase in 2019, Warren Buffett has repeatedly expressed regret for not buying sooner.

Amazon is now the world leader in e-commerce, but has also become an incredibly diverse company. Its Amazon Web Services (AWS) business is widely regarded as the leading cloud service provider, and its advertising segment generated $32.6 billion in sales over the past four quarters, more than Alphabetof the YouTube video platform.

Advertising could be an important source of revenue for Amazon in the future as the company leverages its growing portfolio of digital assets. These include his music platform and NFL rights. Thursday night football on its Prime streaming service. But for now, AWS is the star of the show, serving as the profitability engine behind the entire company. Despite accounting for just 14% of Amazon’s $477.7 billion in total revenue, AWS is responsible for all of its operating revenue over the past four quarters.

Earlier this year, Amazon announced a new $10 billion stock buyback program, which was the final piece of the Buffett puzzle. Now Amazon is profitable, diverse, and making money for shareholders. It also has a 25-year track record of performance. With Amazon’s stock currently down 41% from its all-time high amid the broader tech selloff, investors might want to buy the dip.

The case of Apple

Not only is Apple (AAPL 1.15%) the largest company in the world, with a market valuation of $2.3 trillion, but it’s also the largest position in Buffett’s portfolio. It represents 41.1% of Berkshire’s $322.7 billion in total stock and, like Amazon, it ticks all the boxes.

While Apple is best known for its hardware products such as the iPhone, iPad, AirPods and Mac computer lines, it has rapidly expanded its portfolio of services, which are growing faster and more profitable at the margin. These include Apple Pay, Apple Music, iCloud and the Apple TV+ streaming platform, to name a few.

Where a consumer might buy a new iPhone once a year or two, most of Apple’s service brands are subscription-based, so they generate recurring revenue every month, in many cases. . Over the past four quarters, the services segment accounted for 19.4% of Apple’s $386 billion in revenue, so it’s still a relatively small share of the overall business. But it grew 24.4% from the previous 12-month period, which is much faster than the 17.3% growth in the product segment.

Based on Apple’s latest second quarter of fiscal year 2022 (ending March 26), the services segment had a gross profit margin of 72%, compared to just 36% for products. This is because Apple’s services are digital and can be delivered instantly at low cost, whereas hardware is expensive to manufacture. Either way, the two business units complement each other well and have combined $101 billion in net income (profit) over the past four quarters.

What does Apple do with all that money? In addition to investing in new innovations, it returns a significant amount to shareholders in two ways. First, it pays a modest quarterly dividend of $0.23 per share, which equates to a dividend yield of 0.68%. Second, it has a very large share buyback program, totaling $90 billion at the moment, but it’s tracking $43 billion in the past two quarters and another $85 billion in fiscal 2021.

It’s no wonder Buffett is hot on Apple stocks. Since the stock is trading at a 20% discount to its all-time high, maybe you should be too.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Anthony Di Pizio has no position in the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), long $120 calls in March 2023 on Apple, short $200 calls in January 2023 on Berkshire Hathaway (B shares) , short calls of $265 in January 2023 on Berkshire Hathaway (B shares) and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

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