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5 Berkshire Holdings that Made 2016 Buffett's Best Year
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Legendary value investor Warren Buffett, chairman and CEO of Berkshire Hathaway Inc. (BRK.A - Free Report) (BRK.B - Free Report) , is widely followed by investors around the world for his investment acumen. Well known for his value investing in equities and ability to reap immense returns from them, his portfolio of investments is closely followed by investment managers.
Apart from earning revenues from his mammoth conglomerate, the company also derives a substantial amount of investment income from its large investment portfolio. The company’s performance so far this year has been significantly better than 2015, with improved equity markets and a strengthening U.S economy.
A Disappointing 2015
The year 2015 was the worst for Berkshire since 2008. Its stock underperformed the S&P by declining 12.1% compared with a decline of 0.7% and 7.9% in the S&P 500 index and Zacks categorized Property and Casualty Insurance industry, respectively. Reasons for lackluster performance by Berkshire Hathaway were more than one.
The company was hurt by falling commodity prices; its energy business suffered from lower cost of gas sold, lower gas sales and a strong dollar. Apart from subdued performance by some of its units, the stock felt the effect of some of Buffett's big stock bets that tanked in 2015.
Bounce Back
Though the lackluster performance of 2015 signaled problems for 2016 the stock bounced back. Superior performance in 2016 was primarily attributed to high returns generated from its equity investments, though the company’s insurance underwriting operations and railroad business generated lower earnings for the first nine months of 2016. It was partly offset by higher earnings contribution from its utilities and energy business and manufacturing, service and retailing businesses.
Year to date, the company is up 25.7%, which is higher than the gain of 23% generated by the Zacks categorized Property and Casualty Insurance industry. The company has tremendously beaten the return of 10.6% logged by the S&P 500 Index over the same time frame.
The company’s insurance business which comprises approximately 25% of its revenues produces a huge amount of float (investible surplus) which has traditionally been invested by Buffett primarily in equity stock of other companies. Some of his large investments according to the most recent filing include Kraft Heinz Co. (KHC - Free Report) , Coca-Cola Co. (KO - Free Report) , Wells Fargo & Co. (WFC - Free Report) , IBM (IBM - Free Report) and American Express Co. (AXP - Free Report) . Its largest three holdings make up nearly 52% of the entire portfolio.
Let’s take a look at some of the company’s investments which have driven up the stock this year. While all of them have done better than the S&P 500 index return of 10.6% year to date, most of them have also outperformed their respective Zacks categorized industry.
Kraft Heinz and Co. with a Zacks Rank #3 (Hold) has returned 19% year to date, more than double the gain of 7.5% logged by the Zacks categorized Food Miscellaneous Diversified industry, and the 10.6% by the S&P 500 index. The company enjoys long-standing consumer recognition. Strong brand portfolio, cost savings initiatives, innovation and marketing efforts increases growth prospects for the company.
Deere & Co. (DE - Free Report) with a Zacks Rank #1 (Strong Buy) has returned 35.2% year to date, higher than the return of 34.8% generated by the Zacks categorized Machinery Farm industry, and 10.6% by the S&P 500 index. The Illinois-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide has been benefiting from the proper execution of its operating plans, disciplined cost management as well as its broad product portfolio.
Deere projects net income of $1.4 billion in fiscal 2017. It stands firm on its commitment to reduce structural costs by $500 million by fiscal 2018 through indirect and direct material cost reduction, reduced headcount and other initiatives. Increase in construction spending, improvement in political conditions in Brazil and positive conditions in India are likely to lead to better results. In the long term, the company stands to gain from favorable trends, supported by increasing population and rising living standards. Further, focus on investments in new products and geographies remain as tailwinds.
IBM with a Zacks Rank #3 has returned 21.6%, though lower than 30.4% by the Zacks categorized Computer- Integrated Systems industry. The company is having a tough time, given the ongoing and heavily time-consuming business model transition to cloud. Further, sluggish IT spending particularly on on-premise and data center hardware and foreign exchange volatility remain as concerns.
Moreover, intensifying competition in the cloud is a major headwind. Nevertheless, IBM's strategic growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. In addition, the company’s policy of making strategic acquisitions will lead to incremental revenues, strengthening its technology leadership and resulting in a more favorable mix of business. The acquisitions have also increased its scale of operations globally.
US Bancorp. (USB - Free Report) with a Zack Rank # 2 (Buy) comprising 2.83% of the total investment portfolio returned 22.3% higher than the growth of 21.3% by Zacks categorized Banks- Major Regional industry and 10.6% by the S&P 500 index. Headquartered in Minneapolis, the company’s growth prospects should continue to get support from its solid business model, core franchise and diverse revenue streams.
Also, the company raised its prime lending rate to 3.75%, following Fed’s interest rate hike to 0.50% to 0.75%. This is expected to alleviate some margin pressure. Further, the company's steady capital deployment activities continue to enhance shareholders’ value.
M&T Bank Corp. (MTB - Free Report) with a Zacks Rank #3 returned 28.7% higher than the growth of 21.3% by Zacks categorized Banks- Major regional industry and 10.6% by the S&P 500 index. Headquartered in Buffalo, NY, the company’s top-line growth seems encouraging given its diverse fee income base and consistent rise in deposit and loan growth amid an improving economy. Following the Hudson City merger in Nov 2015, the company remains focused on converting its New Jersey operations to commercial bank from thrift.
Berkshire Hathaway carries a Zacks Rank # 3 (Hold). Looking for the Best Stocks for 2017? Be among the first to see our Top Ten Stocks for 2017 portfolio here
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5 Berkshire Holdings that Made 2016 Buffett's Best Year
Legendary value investor Warren Buffett, chairman and CEO of Berkshire Hathaway Inc. (BRK.A - Free Report) (BRK.B - Free Report) , is widely followed by investors around the world for his investment acumen. Well known for his value investing in equities and ability to reap immense returns from them, his portfolio of investments is closely followed by investment managers.
Apart from earning revenues from his mammoth conglomerate, the company also derives a substantial amount of investment income from its large investment portfolio. The company’s performance so far this year has been significantly better than 2015, with improved equity markets and a strengthening U.S economy.
A Disappointing 2015
The year 2015 was the worst for Berkshire since 2008. Its stock underperformed the S&P by declining 12.1% compared with a decline of 0.7% and 7.9% in the S&P 500 index and Zacks categorized Property and Casualty Insurance industry, respectively. Reasons for lackluster performance by Berkshire Hathaway were more than one.
The company was hurt by falling commodity prices; its energy business suffered from lower cost of gas sold, lower gas sales and a strong dollar. Apart from subdued performance by some of its units, the stock felt the effect of some of Buffett's big stock bets that tanked in 2015.
Bounce Back
Though the lackluster performance of 2015 signaled problems for 2016 the stock bounced back. Superior performance in 2016 was primarily attributed to high returns generated from its equity investments, though the company’s insurance underwriting operations and railroad business generated lower earnings for the first nine months of 2016. It was partly offset by higher earnings contribution from its utilities and energy business and manufacturing, service and retailing businesses.
Year to date, the company is up 25.7%, which is higher than the gain of 23% generated by the Zacks categorized Property and Casualty Insurance industry. The company has tremendously beaten the return of 10.6% logged by the S&P 500 Index over the same time frame.
The company’s insurance business which comprises approximately 25% of its revenues produces a huge amount of float (investible surplus) which has traditionally been invested by Buffett primarily in equity stock of other companies. Some of his large investments according to the most recent filing include Kraft Heinz Co. (KHC - Free Report) , Coca-Cola Co. (KO - Free Report) , Wells Fargo & Co. (WFC - Free Report) , IBM (IBM - Free Report) and American Express Co. (AXP - Free Report) . Its largest three holdings make up nearly 52% of the entire portfolio.
Let’s take a look at some of the company’s investments which have driven up the stock this year. While all of them have done better than the S&P 500 index return of 10.6% year to date, most of them have also outperformed their respective Zacks categorized industry.
Kraft Heinz and Co. with a Zacks Rank #3 (Hold) has returned 19% year to date, more than double the gain of 7.5% logged by the Zacks categorized Food Miscellaneous Diversified industry, and the 10.6% by the S&P 500 index. The company enjoys long-standing consumer recognition. Strong brand portfolio, cost savings initiatives, innovation and marketing efforts increases growth prospects for the company.
Deere & Co. (DE - Free Report) with a Zacks Rank #1 (Strong Buy) has returned 35.2% year to date, higher than the return of 34.8% generated by the Zacks categorized Machinery Farm industry, and 10.6% by the S&P 500 index. The Illinois-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide has been benefiting from the proper execution of its operating plans, disciplined cost management as well as its broad product portfolio.
Deere projects net income of $1.4 billion in fiscal 2017. It stands firm on its commitment to reduce structural costs by $500 million by fiscal 2018 through indirect and direct material cost reduction, reduced headcount and other initiatives. Increase in construction spending, improvement in political conditions in Brazil and positive conditions in India are likely to lead to better results. In the long term, the company stands to gain from favorable trends, supported by increasing population and rising living standards. Further, focus on investments in new products and geographies remain as tailwinds.
IBM with a Zacks Rank #3 has returned 21.6%, though lower than 30.4% by the Zacks categorized Computer- Integrated Systems industry. The company is having a tough time, given the ongoing and heavily time-consuming business model transition to cloud. Further, sluggish IT spending particularly on on-premise and data center hardware and foreign exchange volatility remain as concerns.
Moreover, intensifying competition in the cloud is a major headwind. Nevertheless, IBM's strategic growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. In addition, the company’s policy of making strategic acquisitions will lead to incremental revenues, strengthening its technology leadership and resulting in a more favorable mix of business. The acquisitions have also increased its scale of operations globally.
US Bancorp. (USB - Free Report) with a Zack Rank # 2 (Buy) comprising 2.83% of the total investment portfolio returned 22.3% higher than the growth of 21.3% by Zacks categorized Banks- Major Regional industry and 10.6% by the S&P 500 index. Headquartered in Minneapolis, the company’s growth prospects should continue to get support from its solid business model, core franchise and diverse revenue streams.
Also, the company raised its prime lending rate to 3.75%, following Fed’s interest rate hike to 0.50% to 0.75%. This is expected to alleviate some margin pressure. Further, the company's steady capital deployment activities continue to enhance shareholders’ value.
M&T Bank Corp. (MTB - Free Report) with a Zacks Rank #3 returned 28.7% higher than the growth of 21.3% by Zacks categorized Banks- Major regional industry and 10.6% by the S&P 500 index. Headquartered in Buffalo, NY, the company’s top-line growth seems encouraging given its diverse fee income base and consistent rise in deposit and loan growth amid an improving economy. Following the Hudson City merger in Nov 2015, the company remains focused on converting its New Jersey operations to commercial bank from thrift.
Berkshire Hathaway carries a Zacks Rank # 3 (Hold). Looking for the Best Stocks for 2017? Be among the first to see our Top Ten Stocks for 2017 portfolio here
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>