Berkshire Hathaway's First-Half Winners: Apple and Japan's Sogo Shosha

"Mr. Buffett and Mr. Abel continue to be delighted with the investments and hope, eventually, to own 9.9% of each of the [sogo shosha]."

Happy Tuesday and welcome to our new subscribers!

A year ago, Occidental Petroleum and Chevron rode a wave of inflation (and war) to massive gains. In fact, the two oil-and-gas giants ranked among the very top-performing stocks in the entire S&P 500 index during 2022.

This year, though, has been an entirely different story.

In 2023, both OXY 0.00%↑ and CVX 0.00%↑ have fallen off the pace — opening the door for other Berkshire Hathaway holdings to step into the spotlight. One of which (Apple) has roared back to life after a disappointing 2022.

And the others — Japan’s five largest trading houses — continue to prove that, sometimes, the best investments can be found in the most unlikely of places.

As we near the halfway mark of 2023, let’s take a closer look at these big winners…

---

---

Apple

Apple is, by far, the largest position in Berkshire Hathaway’s portfolio — with a (staggering) current value of $169.3 billion. That’s good for 5.8% of the iPhone maker.

And, ever since this one holding ballooned to such mind-boggling size over the past few years, it now holds an increasingly lopsided impact on Berkshire’s investment results. As Apple goes, so goes Berkshire’s portfolio.

Happily, things have been going pretty well in Cupertino of late.

Apple is up 47.8% in 2023 and hit a new 52-week high just last week. Those sparkling numbers put the tech giant within spitting distance of a $3 trillion market cap. AAPL 0.00%↑ already holds the record as the first U.S. company to surpass the $1 trillion and $2 trillion marks — and looks like the odds-on favorite to complete this trifecta sooner rather than later.

Back in January, I wondered if Berkshire might take another bite of Apple after its big fall (-26.8%) in 2022. As it turned out, the answer was no. I don’t know if Warren Buffett and co. regret not buying the dip, but I sure do. I write about this stuff and then sit on my hands instead of pulling the trigger on a blue-chip like Apple. Make it make sense.

(If Buffett shares my sorrow on missing this latest buying opportunity, he can dry his tears on the $54.8 billion paper gain that Berkshire has made on Apple in the last six months. That kind of price appreciation washes away a lot of “mistakes”.)

Anyway, Apple got a big boost with better-than-expected iPhone sales in the March quarter — achieving $51.3 billion in revenue from smartphones alone. “We are pleased to report … a March quarter record for iPhone despite the macroeconomic environment,” said CEO Tim Cook. The Services segment was a winner, too.

Apple also raised its dividend by 4% and authorized $90 billion for additional share repurchases. But, with Apple stock soaring to new heights, that $90 billion won’t go as far as it used to. That might just be a “me” concern, though. Apple has never been particularly price sensitive when buying back its own stock — which, oddly enough, doesn’t seem to bother Buffett, either.

Of course, when you’re raking in more than $111 billion of free cash flow each year, that money’s got to go somewhere.

Apple, at roughly 30x earnings, isn’t in the P/E stratosphere like Nvidia. But it isn’t exactly undervalued, either — meaning that substantial repurchases probably won’t provide the most bang for Tim Cook’s buck. I don’t think this represents poor capital allocation by any means, just something less than ideal. (Although I certainly defer to Buffett and Cook on this point. If they’re happy, I’m happy.)

---

Sogo Shosha 🇯🇵

In 2020, when Warren Buffett announced sizable investments in the five largest Japanese trading houses — also known as sogo shosha — doubters and naysayers came out of the woodwork. These “old economy” conglomerates were viewed — and valued — like dinosaurs on the eve of extinction.

Berkshire Hathaway, though, is having the last laugh. (At least for now.)

Just yesterday, Buffett revealed increased investment in the sogo shosha — lifting Berkshire’s ownership interest in Itochu, Mitsubishi, Mitsui, Marubeni, and Sumitomo to approximately 8.5% of each on average.

And he doesn’t plan to stop there.

“Mr. Buffett and Mr. Abel continue to be delighted with the investments and hope, eventually, to own 9.9% of each of the five companies,” said the press release.

So what are the sogo shosha?

Well, it’s complicated.

These conglomerates traditionally focused on importing energy, minerals, and food into Japan and, then, exported finished products to the rest of the world. Over time, though, they’ve begun to diversify away from wholesaling and fossil fuels in an attempt to stay relevant in a changing world.

(Mitsubishi, for example, recently announced plans to invest in lithium and nickel mining — two critical components of EV battery production.)

The sogo shosha now control sprawling collections of businesses and investments that are not dissimilar to Berkshire itself. Honestly, the trading houses have their fingers in so many different pies that it can be hard to keep it all straight.

Here’s an example of this interconnected web of commerce (via Nikkei):

At a FamilyMart convenience store in Tokyo, shoppers grab fresh bananas and pay using their smartphones. A familiar scene, but few would know that one company is orchestrating almost the entire transaction — from growing the bananas to owning the store and even developing the smartphone payment system.

The company, Itochu, is one of Japan’s venerable “sogo shosha” or trading houses — a quintessential feature of the country’s corporate landscape, sprawling across dozens of business sectors.

Itochu not only owns FamilyMart, which it recently took full control of in a $5.5 billion transaction. It also produces bananas and pineapples on Mindanao island in the southern Philippines as the owner of Dole’s Asian fresh food business, and ships them to Japan, South Korea, and — an anticipated growth market — China.

That last point could prove especially important. “[The sogo shosha] have spent far more time figuring out how to deal with a rising China than many,” says Guy Spier.

Even though the wider market initially scoffed at Berkshire’s investments in the trading houses, Buffett’s reasoning was clear: the sogo shosha were available at rock-bottom prices. In fact, four of the five traded below book value in August 2020.

“I was confounded by the fact that we could buy into these companies [at those prices],” Buffett told CNBC in April. “They were selling at what I thought was a ridiculous price — particularly compared to the interest rates prevailing at that time.”

But that was then and this is now.

Today, the sogo shosha are flying high, posting record-breaking profit numbers and zooming up in price. After Buffett’s CNBC interview — in which he also revealed that dividends from the trading houses had “gone up 70% or something” since his first batch of purchases in 2020 — overseas investors poured into the market, snapping up $7.83 billion of Japanese stocks over the following five days.

All told, Berkshire’s stakes in the sogo shosha have gone from surprising to spectacular. Business Insider recently reported that they have “gained an average of 181% since Buffett’s original disclosure”. And now, after yesterday’s news, Berkshire’s combined investment in Japan is worth over $20 billion — behind just Apple, Bank of America, American Express, Coca-Cola, and Chevron in portfolio value.

Warren Buffett’s foray into Japan has quietly — and quickly — turned into a core part of Berkshire Hathaway’s investment universe. Long may that continue.

Come back on Friday for even more Japan-related info in The Berkshire Beat.