Warren Buffett's knack for finding great companies at prices that leave room for substantial appreciation, and holding their stocks for the long term, has made him one of the most successful investors in history. With such a storied track record, it's no surprise that people play close attention to his moves and aim to replicate his incredible performance.
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In that spirit, we asked a panel of Motley Fool investors to profile a stock that Warren Buffett fans won't want to miss out on. Read on to see why they selected United Parcel Service (NYSE: UPS), Phillips 66 (NYSE: PSX), and Apple (NASDAQ: AAPL) as top investments for followers of the Oracle of Omaha.
Delivering on its potential
Rich Duprey (United Parcel Service): The holidays are upon us, and that means the annual shopping frenzy is about to begin. FTI Consulting projects consumers will spend 4.5% more on holiday-related purchases this year than they did last year, up from the 3.3% growth achieved during the 2016 season. Importantly, though, the vast majority of the growth will benefit online retailers, as two-thirds of the estimated overall sales gain this season will come from the online channel. Those purchases will have to make it to the consumer somehow, and that's where United Parcel Service gets to benefit.
Last month Big Brown said it expects to ship 750 million packages this holiday season -- up 7% from the 700 million it expected to ship last year -- but some 510 million of the shipments will occur in the last four weeks before Christmas. In addition, the company has raised peak rates for residential packages, large packages, and packages over maximum limits shipped between Nov. 19 and Dec. 23.
Earlier this year, UPS also expanded its Saturday service, meaning that it will have 40% more volume it will be able to deliver on that extra day.
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While its stock has pulled back about 6% from the recent highs it hit as investor concerns grow about rising costs -- the package delivery company is hiring 95,000 workers this season -- UPS still appears poised to capitalize on the growth opportunities before it. Analysts expect it to grow earnings at 8% annually over the next five years, not bad for a company generating $64 billion a year. There's a reason Warren Buffett likes this company, and it's probably why you should too.
Energy without the insane volatility
Chuck Saletta (Phillips 66): The energy industry tends to go through boom and bust cycles, driven largely by the price of oil. During boom times, a ton of money can be made -- especially by those that get in as the boom is just getting started -- but when the bust comes, look out below. Yet only part of the energy industry is fully exposed to the worst of those swings -- the exploration and production side of the industry.
There's an entire chain of transportation, refining, and retail that happens after that energy is lifted out of the ground. The value created in that part of the industry depends more on the crack spread -- the gap between the price of oil and the price of its refined products -- than it does on the price of oil itself. That's where Phillips 66 operates, and its ability to generate cash despite the fluctuations in the price of oil is one reason it's a big Warren Buffett holding.
Based on its most recent 13F filing, Buffett's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) owns over 80.6 million shares of Phillips 66. At recent market prices above $90 per share, that position is worth over $7 billion. While that price is above Buffett's recent buy-in price, it still looks like a reasonable price for a company with the long-run cash-generating capacity that Phillips 66 appears to have ahead of it.
A top tech stock in the Buffett mold
Keith Noonan (Apple): The Oracle of Omaha is famously averse to tech stocks, but he made an exception with Apple -- and it's been paying off big time. Buffett first initiated a position in the company in the first quarter of 2016 -- buying 9.8 million shares at an average price of $109. Those shares are up more than 55%, and the investor has continued his bullish streak on the stock and snatched up enough shares to make it his company's third-largest holding. Across the September-ended quarter, Buffett added 3.9 million new Apple shares to Berkshire's holdings, an increase of roughly 3% that brought Berkshire's total shares held north of 139 million.
While shares have gained more than 45% this year, Apple still presents appealing value. Shares trade at just 15 times forward earnings estimates, and the company's tremendous brand strength, resilient iPhone business, and momentum for its services segment and emerging-product categories suggest the growth is poised to continue. The company's September-ended quarter saw its earnings per share increase 24% year over year, and an ongoing share-buyback initiative is making it even easier for the company to deliver earnings growth.
Apple stock is also an income generator -- another reason it fits the Buffett mold. Its yield isn't huge at roughly 1.5%, but it's raised its payout for five years running, and a 22% payout ratio leaves lots of room for growth. With a reasonable valuation, a moat created by its brand strength and the synergy of its product ecosystem, and a growing returned income component, Apple stands out as a top stock for Buffett fans.
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Chuck Saletta has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.