Though the S&P 500 gained 1.25% for the year, it favored mostly growth stocks such as Amazon and Netflix while less dynamic value stocks languished. Since Buffett typically buys companies that have predictable earnings, simple businesses, economic moat and reasonable price – criteria that generally overlap with value principles – the year was lackluster for his core holdings as well.
The chart below shows the weighted returns for the largest stocks in Buffett’s portfolio for full-year 2014 and for year-to-date 2015. It omits stocks that were not included in the portfolio for both years and is based on the portfolio weightings at the beginning of both years. Based on this general data, Buffett’s top stocks declined by approximately 6.1% in 2015. The first two months of 2016 have not been any kinder. In that brief period, the stocks had a weighted decline of approximately 7.6%.
On the positive side for Buffett, and less positive for those shopping for better deals on the same companies, fewer of his positions have spiraled to their 52-week low prices than they did in the recent past. In November three of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)’s holdingstraded at their lowest price in a year. In January 2016, that number spiked to nine, including his biggest position Wells Fargo (NYSE:WFC). As of March 3, only one of his holdings, the small Sanofi SA (NYSE:SNY) at 0.13% of the portfolio, traded near a 52-week low.
Buffett maintained a high opinion of his “big four” investments, American Express, Coca-Cola (NYSE:KO), IBM and Wells Fargo, as of February, though American Express and IBM were among his biggest laggards.
“These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. Their returns on tangible equity range from excellent to staggering,” he said in his 2015 annual letter.
The letter continued: “The earnings our investees retain are often used for repurchases of their own stock – a move that increases Berkshire’s share of future earnings without requiring us to lay out a dime. The retained earnings of these companies also fund business opportunities that usually turn out to be advantageous. All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital gains.”
Wal-Mart Corp. (NYSE:WMT)
After stagnating for three years from roughly 2012 through 2014, shares of retailer Wal-Mart tumbled 26.3% in 2015. The slide reduced Buffett’s more than $2 billion profit on the holding at the end of 2014 to only $300 million at the end of 2015. On Feb. 18, Wal-Mart reported its fourth consecutive quarter of lower year-over-year earnings, and second of lower year-over-year revenue as it faces a changing retail landscape. Over the next several years, the company plans to fortify its U.S. and online businesses, according to its annual meeting. It expects sales growth between 3-4% for the next three years but lower earnings as it increases capital expenditures on higher wages and worker training. EPS for 2017 is expected to fall between 6-12% for fiscal 2017 before picking up by 5-10% by 2019.
Wal-Mart in October gave itself authorization to repurchase $20 billion worth of its shares, replacing the leftovers of an older plan. Its also increased its cash dividend for the 43rd consecutive year to $2 per share from $1.96 per share for 2017.
Year to date Wal-Mart’s stock rose 7.9% to around $66.14 per share Thursday afternoon.
2015 ROE: 18.15%
10-year EBITDA growth rate: 8.6%
Dividend yield: 2.98%
American Express (NYSE:AXP)
Having held American Express since the mid-1980s at an incredibly low cost basis, American Express would have to sink for more than the 24.06% it did in 2015 to eliminate his sizable profit. Buffett holds 151,610,700 shares, which originally $1.29 billion and had a year-end market value of $10.55 billion. American Express shares erased almost four years of gains with a sharp drop in January, when the company lowered its EPS outlook for 2016 and 2017 due to business pressures, lower merchant fees, increased competition and cyclical factors in the economy.
Year to date American Express shares fell a further 16.7% to trade around $58.04 Thursday afternoon.
2015 ROE: 24.5%
10-year EBITDA growth rate: 10%
Dividend yield: 1.95%
Deere & Co. (NYSE:DE)
Farm equipment maker Deere & Co. grew as a portion of Buffett’s portfolio in the years since he initiated a position in 2012. In the fourth quarter 2015, he added more than 5.8 million shares of it for a total holding of 22,884,150 shares. With its 11.1% decline in stock price for 2015, Buffett has a loss on his Deere investment, which cost $1.77 billion and ended the year with a market value of $1.69 billion.
In recent quarters Deere has struggled due to a slowdown in global demand for farm and construction equipment. For 2016 it expects a 10% drop in sales, it announced last month. In the first quarter, revenue in both of its segments was down by double-digits: agriculture and turn by 12%, and construction and forestry by 23%, compared to a year earlier. The USDA Economic Research Service predicts net cash and net farm income to drop for the third straight year in 2016 after reaching a peak in 2013 for net farm income and 2012 for net cash income, though less than in 2015, it said last month.
Deere & Co. stock turned a corner in 2016, gaining almost 10% to trade around $83.67 per share Thursday afternoon.
2015 ROE: 24.5%
10-year EBITDA growth rate: 9.3%
Dividend yield: 2.89%
A company in transition, IBM’s shares also fell 11.1% last year to roughly five-year lows. Its second straight year of double-digit declines also steepened Buffett’s loss on the company to $2.64 billion, the biggest of his top-12 positions for the year. Buffett continued to buy shares of IBM many times as the price fluctuated over the years since he began the position in 2011.
IBM’s earnings declined year-over-year in three out of four quarters in 2015, while year-over-year revenue declined for each quarter of the year. Financial results reflect its shift in focus toward building its cloud, internet of things and cognitive solutions offerings and away from traditional information technology products and services, which it has been undergoing for several years.
Shares of IBM rose 0.14% year to date to close at $137.81 each Thursday.
2015 ROE: 100.96%
10-year EBITDA growth rate: 8.1%
Dividend yield: 3.78%
See more of Buffett’s stocks at his portfolio here.
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— Guru Focus