Best Stocks Warren Buffett Is Buying Now

By Todd Campbell Markets Fool.com

Warren Buffett's ability to pick long-term winners forBerkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B)portfolios has made his buying decisions must-know news.Fortunately, big investors like him have to file a 13F report with the Securities and Exchange Commission every quarter that shows what he's been buying.

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According to Warren Buffett's latest 13F, his top stocks for new money includeApple Inc. (NASDAQ: AAPL), Southwest Airlines (NYSE: LUV), and Bank of New York Mellon(NYSE: BK). Should you be buying these stocks, too?

A massive bet on upgrades

Warren Buffett once told Steve Jobs to use Apple's cash to buy back stock, but it took Buffett until 2016 to follow his own advice.

Image source: The Motley Fool.

Now, Apple is Berkshire Hathaway's third largest position. In the first quarter, Buffett bought nearly 72 million shares of Apple, bringing the total number of shares owned by Berkshire Hathaway to over 129 million.

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At current prices, that position is worth over $19 billion. Why is Buffett betting so big on Apple? At the time of his first purchase, Apple shares had sunk to lows on fear that slowing sales in China was a signal of weakness to come. Since then, China has shown signs of recovery, and with rumors suggesting Apple's next iPhone will include new features like 3D sensing, Apple could be about to see demand surge as device owners upgrade.

While Apple was a cheap stock when Buffett first began buying, it's gotten more expensive since then. In the past year, Apple's shares have rallied over 60%. There could be more room to run higher, but Buffett did recently hint that he's having trouble buying more shares now that prices have run up so much.

Nevertheless, the potential for this technology behemoth to enjoy a rush of sales remains a key catalyst heading into 2018, and for that reason, investors might want to join Buffett in buying Apple if shares dip.

First-class operator takes flight

In the past, Warren Buffett has said a surefire way to become a millionaire is to start out a billionaire and buy an airline. Yet, shares in Southwest Air were among his biggest buys in the first quarter.

Southwest is a discount airline that's known for folksy, fun service, and Warren Buffett lists co-founderHerb Kelleher as a friend.

In Q1, Buffett added over 4.4 million shares in Southwest Airlines to Berkshire Hathaway's portfolio, bringing its total stake north of 47 million shares. Coming out of the first quarter, Berkshire Hathaway is Southwest Airlines' second biggest shareholder.

By his own admission, one of Buffett's worst stock picks in his career was USAir, an operator he bought back in the late 1980s that declared bankruptcy twice. He ultimately made money on USAir, but he still refers to it as a "dumb" buy because, historically, the industry has suffered from too much capacity, too much price competition, and too high costs.

Today, Buffett appears to believe that those headwinds have eased. Bankruptcies and mergers have rightsized capacity and airlines are far less willing to sell seats at bargain-basement prices. A strong economy is also helping increase load factors, and rising oil production in the U.S. due to shale drilling has helped keep jet fuel prices in check. As a result, operators including Southwest have been delivering solid growth.

LUV Revenue (TTM) data by YCharts.

Warren Buffett's also been buying Southwest's competitors, including American Airlines, so he seems to like the industry as a whole. However, I'm not convinced that airlines will remain a staple holding in Berkshire Hathaway's portfolio. The industry has made significant changes to its business model that have paid off, but it's still a cyclical industry with high capital expenses. Because of these reasons, Buffett could view these bets on airlines as opportunistic rather than long-term investments. If I'm correct, then he could sell at any point; especially since shares have rallied considerably higher.

Buying banking

In spite of a high-profile scandal at his biggest holding, Wells Fargo, Warren Buffett hasn't soured on banks. In Q1, he added 11.3 million more shares to his existing position in Bank of New York Mellon, and as a result, he now owns 33 million shares in it.

Banking's appeal is understandable. Following the Great Recession, bank earnings have been weighed down by the government's low-interest policies, but now that those policies are ending, banks are poised to see their net interest margins climb.

Bank of NY Mellon, however, isn't an ordinary bank.

The company is a leader in asset management, and while it makes money lending to businesses and high-net-worth clients, it's benefiting significantly from rising equity markets' positive impact on fees.Last quarter, a record $30.6 trillion in assets under management or administration helpedrevenue grow 2.7% year over year to $3.84 billion. In the quarter, investment services revenue accounted for $3 billion of total sales.

Meanwhile, the bank's cost controls helped non-interest expense grow more slowly than sales, providing leverage that allowedthe company to report earnings per share of $0.83, which was $0.03 better than Street forecasts, and 14% higher than last year.

Its improving financials suggest there's plenty of financial firepower to continue returning a lot of money to investors. Last quarter alone, buybacks and dividend payments totaled $1.1 billion.

As long as global markets are strong and high-net-worth clients finances are holding up, Bank of NY Mellon should perform well, and since there's little evidence of a pending recession, it's not surprising that Buffett continues to warm up to this one.

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Todd Campbell owns shares of Apple. His clients may have positions in the companies mentioned.The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.