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

The Prophet of Omaha has been buying; should we follow him?

Observing the best investors provides excellent insight. Active institutional investors' purchases and sales of stocks reveal their views on the market and the economy. However, it is important to remember that these investors have different goals, time frames and resources from most of us, so it is impractical to reflect their every move.

Warren Buffett's outstanding investment holding company Berkshire Hathaway recently made some interesting deals; increased its oil stock stake in Occidental Petroleum (oxidized-2.44%), opened a new bank position in Citigroup Inc (C0.27%), and continued to work in Apple Inc (AAPL1.51%). Let's take a closer look.

A little more on the pump, a little more on your retirement account?

Gasoline prices have fallen a bit, but they continue to inflict pain on Americans. High oil prices are not fun, but investors can take advantage of high oil prices and energy stocks. Oil stocks usually pay high dividends and earn tons of cash flow when fuel prices rise.

Berkshire's oil acquisitions in the West require a lot of insurance. The group increased its stake in oil exploration and production companies to nearly 20 per cent. Once its stake reaches 20%, Berkshire Hathaway will report its investments in different ways on its books because of accounting rules.

What does this mean to us? Two things:

Berkshire Hathaway believes that Western countries will achieve excellent performance in the coming period of time (great! ).
Once the 20% threshold is reached (not very high), their bulk purchases may stop or slow down.
The acquisition of Anadarko Oil Company by Western countries in 2019 created huge debts. In the wake of the epidemic, Western countries slashed their dividends from $0.79 a quarter to a nominal penny. The dividend eventually returned to $0.13 a quarter and could soar.

The surge in oil prices comes at a good time. Increased cash flow should enable companies to pay debts and raise dividends. As the chart shows, debt has been falling steadily.

The data passes through the chart.

Western stocks are suitable for investors with at least moderate risk tolerance. For example, if there is a severe recession, oil prices may fall, and Berkshire Hathaway may soon stop buying shares, causing the share price to fall potentially. On the other hand, if oil prices continue to rise and fully return to long-term shareholders, dividends could surge.

Is Citi too cheap to ignore?

Many people were surprised when Berkshire bought nearly $3 billion of Citigroup shares in the first quarter of 2022. Citi's share price is still well below its pre-epidemic level and lags behind peers like Bank of America Corporation and JPMorgan Chase & Co. Low valuations are attractive.

As the chart shows, Citi's price-to-book ratio is much lower than that of its peers, and its dividend yield is the highest.

The data passes through the chart.

The rise in interest rates is a double-edged sword for banks. Higher interest rates mean more interest income. But if higher interest rates plunge the country into recession, the slowdown could hurt the outcome.

The acquisition of Citigroup Inc is a bet that interest rates will rise and the economic slowdown will be quite mild. Lower price-to-book ratios provide a margin of safety, and yields are attractive to income investors.

Will Apple Inc continue to shine?

Apple Inc's stock has returned 325% in the past five years, compared with 71% in the same period last year, including dividends. The gains of the past are shaky and enduring, but the elephants in the room are a potential slowdown in consumer spending. Consumer confidence is now lower than it was during the Great Recession and the epidemic.

The data passes through the chart.

For high-end electronics makers like Apple Inc, this could cause trouble.

Berkshire does not seem worried because more than 40 per cent of its portfolio is in Apple Inc. The reasons are obvious: huge profits, dedicated customer base, good management, and so on.

Apple Inc generates a large amount of cash in each period and returns most of it to shareholders through share buybacks and dividends. When the share price falls, the share buyback becomes more obvious because Apple Inc can buy back more shares at the same cost and increase shareholders' profits when the stock picks up.

Since fiscal year 2019, $318 billion has been returned to shareholders, equivalent to 13 per cent of current market capitalization. As the chart shows, Apple Inc is slightly ahead of last year's brisk pace this fiscal year.

Data source: company documents. A chart by author.

Sales, profits and cash generated by operations have all increased in the current fiscal year. Apple Inc's fundamentals and influence are strong enough to withstand a decline in short-term consumer spending, so it's easy to see why Buffett likes it.

Individuals should not try to reflect actively managed portfolios through trading. After all, institutional investors do not report deals in real time and have different goals. But they do give us clues to what the best minds think. If you are a long-term investor, these different stocks may suit you.