Warren Buffett likes these stocks. Are they suitable for you?

Omaha's oracle has been making purchases; should we follow him?

Observing the most outstanding investors provides excellent insights. Active institutional investors' buying and selling of stocks reveal their views on the market and the economy. However, it is important to remember that these investors have different goals, timeframes, and resources than most of us, so mirroring their every move is not practical.

Warren Buffett's outstanding investment holding company Berkshire Hathaway has recently made some interesting trades; increasing its stake in petroleum stock Occidental Petroleum (-2.44%), opening a new bank position in Citigroup (0.27%), and continuing in Apple (AAPL 1.51%). Let's take a closer look.

More pumping at the pump, more in your retirement account?

Gasoline prices have dropped a bit, but they continue to bring pain to Americans. High oil prices are no fun, but investors can take advantage of them along with the strength of energy stocks. Petroleum stocks usually pay high dividends and earn substantial cash flows when fuel prices rise.

Berkshire's acquisition of shares in Occidental Petroleum in the West requires a substantial amount of insurance. The group has increased its stake in oil exploration and production companies to nearly 20%. Once its holding reaches 20%, Berkshire Hathaway will report its investments on the books in a different way due to accounting regulations.

What does this mean for us? Two things:

Berkshire Hathaway believes that Western countries will achieve excellent performance in the near future (great!)
Once the threshold of 20% (not very high) is reached, their large purchases may stop or slow down.
Western countries' acquisition of Anadarko Petroleum in 2019 led to massive debts. Subsequently, with the pandemic unfolding, these countries slashed dividends from $0.79 per quarter to a mere symbolic one penny. Dividends eventually recovered to $0.13 per quarter and may surge.

The surge in oil prices comes at a perfect time. The increased cash flow should enable the company to pay off debt and raise dividends. As shown in the chart, debt has been steadily decreasing.

The data is presented through charts.

Western stocks are suitable for investors with at least moderate risk tolerance. For instance, in the event of a severe economic downturn, oil prices may fall, Berkshire Hathaway may quickly cease stock buybacks, leading to potential stock price declines. On the other hand, if oil prices continue to rise and adequately reward long-term shareholders, dividends may soar.

Is Citigroup too cheap to ignore?

When Berkshire Hathaway purchased nearly $3 billion worth of Citigroup stocks in the first quarter of 2022, many were surprised. Citigroup's stock price remains well below pre-pandemic levels, lagging behind peers like Bank of America and JPMorgan Chase. The undervaluation is quite attractive.

As shown in the chart, Citigroup's price-to-book ratio is much lower than peers, and its dividend yield is also the highest.

Data is presented through charts.

Rising interest rates can be a double-edged sword for banks. Higher rates mean more interest income. However, if rate hikes lead the country into a recession, the resulting economic slowdown could be damaging.

Acquiring Citigroup is a bet on rising interest rates and a moderately slowing economy. The lower pb ratio provides a safety margin, making the yield attractive to income investors.

Will Apple continue to shine?

Over the past five years, Apple's stock return rate has been 325%, while last year's return rate was 71% on the S&P 500, including dividends. Past gains are impressive but enduring, yet the elephant in the room is the potential slowdown in consumer spending. Current consumer confidence is lower than during the Great Recession and the pandemic.

Data is presented through charts.

For high-end electronics manufacturers like Apple, this could spell trouble.

Berkshire doesn't seem worried, as over 40% of its investment portfolio is in Apple stocks. The reasons are clear: huge profits, a dedicated customer base, excellent management, and more.

Apple generates a large amount of cash every quarter, and returns most of it to shareholders through share buybacks and dividends. When the stock price drops, share buybacks become more prominent, as Apple can buy back more shares at the same cost, increasing shareholder profits when the stock price rises.

Since the 2019 fiscal year, $318 billion has been returned to shareholders, equivalent to 13% of the current market cap. As shown in the chart, Apple is slightly ahead in pace this fiscal year compared to last year.

Source: Company documents. Charts arranged by author.

This fiscal year's sales, profits, and cash generated from operations have all increased. Apple's fundamentals and influence are strong enough to withstand a decrease in short-term consumer spending, so it's easy to understand why Buffett likes it.

Individuals should not attempt to reflect actively managed investment portfolios through trading. After all, institutional investors do not report trades in real-time, and their goals are different. However, they do provide us with clues about how the best minds think. If you are a long-term investor, these diverse stocks may be suitable for you.