What industries does Warren Buffett like the most? Banking and insurance deserve to be at the top of the list. Airlines would fall in there somewhere as well. And although it wouldn't rank as highly, healthcare is an area that the Oracle of Omaha has found attractive through the years.
Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) owns stakes in several major healthcare stocks. I think that three of his favorites are great buys for investors right now: DaVita (NYSE: DVA), Johnson & Johnson (NYSE: JNJ), and Apple (NASDAQ: AAPL). Is Apple a healthcare stock? Yep. Read on to find out why.
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DaVita
Just a couple of years ago, DaVita ranked among Berkshire Hathaway's top 10 holdings. While that's no longer the case, it's not because the large dialysis provider has fallen out of favor. Berkshire has simply bought more shares of other companies while keeping its position in DaVita steady.
Technically, Buffett himself didn't buy DaVita for Berkshire. The decision was made by one of Buffett's right-hand men, Ted Weschler, who previously owned the stock when he ran his own hedge fund. But DaVita didn't become a major holding for Berkshire without Buffett's blessing. The company also checks off several of the boxes for the legendary investor, including a solid management team and a steady cash flow.
DaVita stock hasn't performed well in 2017. One problem stems from the company's relationship with American Kidney Fund, a nonprofit organization that provides financial assistance for dialysis patients. The U.S. Department of Justice issued subpoenas to DaVita and rival Fresenius Medical Care. This investigation stems from concerns that American Kidney Fund could favor patients using the two large dialysis providers over other patients who used smaller dialysis clinics that don't donate to the organization.
This pullback presents an opportunity buy the stock at a discount, in my view. DaVita's long-term prospects still look good. An aging population should translate to more patients needing dialysis. The company also continues to expand through acquisitions.
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Johnson & Johnson
Berkshire has owned Johnson & Johnson since 2006. However, Buffett slashed his stake in the healthcare giant by around 95% in 2012 after the company recalled products several times. Buffett said at the time that J&J had "some wonderful products and a wonderful balance sheet, but too many mistakes have been made."
In retrospect, the biggest mistake appears to have been made by Buffett himself. Over the last five years, the total return for Johnson & Johnson stock has topped that of Berkshire Hathaway. J&J's dividend, which currently yields close to 2.4%, made the difference.