Investors of all persuasions view Warren Buffett as someone who knows how to make money no matter what the stock market throws at him. Since he acquired Berkshire Hathaway in 1965, the former textile factory became a conglomerate with a market capitalization of $594 billion.
Berkshire Hathaway shares have generated gains at a compound annual growth rate of 19.6% over the past 57 years. In its early days, the conglomerate faced more inflation than we see today, and since then it’s survived a handful of nasty recessions and come out shining as a whistle.
Johnson & Johnson (JNJ 1.13%) and Amazon.co.uk (AMZN 3.15%) are among the largest holdings in Berkshire’s portfolio. Here’s how these two stocks are poised to deliver above-market gains for patient investors.
Johnson & Johnson
You’re probably familiar with Johnson & Johnson’s century-old consumer health brands like Band-Aids and Listerine. What you probably don’t realize is that medical technology and pharmaceuticals are responsible for the vast majority of this company’s total revenue stream.
Now is a particularly good time to buy J&J stock as the company plans to transform its consumer segment into a new company. This means that investors who buy the shares now will end up owning shares of two companies in 2023.
The new consumer goods company is expected to grow at a barely perceptible rate of growth. The remaining J&J, however, will be a sleeker machine capable of growing faster than the company can in its current state.
Investors can expect strong growth from J&J thanks in part to soaring sales of Tremfya, a psoriasis drug whose first-quarter sales jumped 41% year-over-year to reach $2.4 billion annualized. In its medical technology segment, demand for electrophysiology products used to make the heart beat properly is on the rise and could go a long way in driving long-term growth.
At recent prices, J&J offers a dividend yield of 2.6%. This percentage is currently not very high, but investors can count on a constant increase. This company has increased payouts for 60 consecutive years, and operations can easily sustain another increase. The company only needed 57% of the free cash flow generated by its operations over the past year to meet its dividend obligations.
Amazon is best known for its online marketplace, but that’s not the only reason Buffett acquired the stock. In addition to somewhat unpredictable retail sales, around 200 million people regularly renew their Prime subscriptions. This gives the retail business stable cash flow so it can operate on razor-thin margins at prices rivals struggle to compete with.
In 2020 and 2021, Amazon doubled the size of its distribution network to meet growing demand. Now that we’re back to business as usual, these new fulfillment centers are weighing on results. As a result, the company recorded a loss of $3.8 billion in the first quarter.
It’s probably only a matter of time before online sales catch up with operating expenses again. In the meantime, a “Buy with Prime” program will help keep all of these new fulfillment centers busy.
Amazon’s diversification is helping it ride out a retail downturn and could allow it to remain buoyant even if the United States enters a deep recession. Its cloud services segment, Amazon Web Services (AWS), is the company’s biggest earner, and it’s growing rapidly. In the first quarter, AWS generated operating profit of $6.5 billion, 57% higher than the prior year period.
Amazon’s reported loss for the first quarter is worrisome, but that’s no reason to avoid action now. With more than $36 billion in cash on its balance sheet and various revenue streams, including a leading cloud services company, Amazon looks set to deliver strong profit growth in the years to come.