Americans might be surprisingly bullish on stocks, but that doesn’t mean it’s an easy time to be a Dow Jones bull. From an unprecedented health crisis to economic data whose closest precedent is the Great Depression, there is no shortage of risks to keep even the most unwavering optimist up at night.
But for many investors, there’s something even more terrifying than a historic economic contraction or the possibility of a second wave of coronavirus infections.
It’s the uncomfortable experience of watching the stock market rally aggressively while Warren Buffett sits the recovery out.
That gnawing feeling grew even more pronounced on Friday after Berkshire Hathaway revealed that it hadn’t just dumped airline stocks in recent months. The investment company also spent the first quarter slashing exposure to three Dow members.
It wasn’t all that surprising to see Travelers Companies abandoned on the cutting room floor. But it was unsettling to see Goldman Sachs and JPMorgan – two of Warren Buffett’s beloved bank stocks – begin to fall out of favor with the Berkshire Hathaway boss.
Yet it’s not all bad news for Dow Jones bulls. The Oracle of Omaha is still betting big on a handful of the index’s 30 components. And while he might not be doubling down, it’s clear that Berkshire is confident that these six stocks will weather the ongoing crisis and emerge just as strong as before.
Stocks with heavy exposure to China face dual threats from the coronavirus pandemic. Alongside the broad hit to the global economy, companies like Apple face additional pressure from the mounting risk of another breakdown in U.S.-China trade relations.
But that doesn’t seem to have shaken Berkshire Hathaway’s conviction in the $1.35 trillion tech giant, which is the most heavily weighted component in the Dow Jones Industrial Average.
Apple remains the largest holding in Warren Buffett’s portfolio. His firm owns an estimated $77.2 billion worth of AAPL shares.
Up next is a string of defensive stocks that could mitigate Berkshire’s downside risk if the stock market does pivot lower.
Coca-Cola is the dominant name in this group. Buffett and Berkshire own more than 9% of all outstanding KO shares, worth an estimated $17.3 billion.
They own small positions in another two of the Dow’s consumer staples stocks – Procter & Gamble and Johnson & Johnson – although PG and JNJ shares collectively account for less than $90 million of Berkshire’s assets.
Don’t mistake Warren Buffett’s sudden U-turn on Goldman Sachs and JPMorgan as a canary in the coal mine for the entire financial sector.
Berkshire added to its stake in PNC Financial during the first quarter, and it retains a massive 18.8% stake in DJIA component American Express. Its position in Visa is much smaller (0.5%), although the $1.9 billion value of that investment still represents a sizable bet.
The coronavirus pandemic presents its own threats to American Express and Visa, but it also presents an opportunity.
Social distancing measures may accelerate the transition away from cash payments and toward “contactless” methods. This could benefit credit card issuers who have already integrated contactless payment functionality into their systems.