No one can fill Warren Buffett's shoes. However, he's passing the baton as Berkshire Hathaway's CEO to a worthy successor in Greg Abel.
Abel currently leads Berkshire Hathaway Energy. He also serves as vice chair of Berkshire's non-insurance operations. Come January 2026, he'll move into the CEO spot long held by Buffett. As Buffett has done for years, Abel will make the final investment decisions for Berkshire's portfolio once he becomes CEO.
If you're wondering what kind of stocks Abel might like, you won't have to guess too hard. Buffett's successor recently revealed five stocks for which he'd love to increase Berkshire's stake by 5x.
Image source: The Motley Fool.
Buffett's Japanese birds of a feather
Buffett has typically focused primarily on U.S. stocks. However, in 2019 he became interested in five Japanese stocks: Itochu(OTC: ITOCF)(OTC: ITOCY), Marubeni(OTC: MARUF)(OTC: MARUY), Mitsubishi(OTC: MSBHF)(OTC: MTSU.Y), Mitsui(OTC: MITSF)(OTC: MITSY), and Sumitomo(OTC: SSUM.F)(OTC: SSUM.Y).
The business models of these five Japanese companies are very similar. All of them are soga shosha, the Japanese term for trading houses. Their operations span multiple industries, including energy, financial services, food, manufacturing, materials, and more.
Each of these five companies pays attractive dividends. All except Itochu sport dividend yields of over 3%. Itochu's yield is a more modest 2.2%.
Probably the biggest difference between the Japanese companies is their size. Mitsubishi is the largest with a market cap of around $80 billion. Itochu and Mitsui trail with market caps of $74 billion and $60 billion, respectively. Marubeni and Sumitomo are the smallest of the group, with both companies' market caps hovering around $31 billion to $32 billion.
Why Buffett and Abel really like these stocks
At Berkshire Hathaway's annual shareholder meeting earlier this month, Buffett mentioned that around six years ago, he began reviewing a book with information about roughly 2,000 to 3,000 Japanese companies. He noticed that Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo traded "at ridiculously low prices."
The attractive valuations of these Japanese stocks piqued his interest. Berkshire started buying shares of each of the companies. Buffett said, "And then we got to know the people better, and everything that Greg [Abel] and I saw, we liked better as we went along."
In his most recent letter to Berkshire shareholders, Buffett listed three things that he and Abel especially like about the five companies: (1) how they deploy capital, (2) their management teams, and (3) their alignment with shareholders. The two Berkshire Hathaway executives appreciated the Japanese companies' commitment to strong dividends and stock buybacks when appropriate.
Abel said at the Berkshire shareholder meeting that he envisions holding positions in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo "for 50 years or forever." He added:
It's too bad that Berkshire has gotten as big as it is because we love that position and I'd like it to be a lot larger. Even with the five companies being very large in Japan, we've got at market in the range of $20 billion invested, but I'd rather have $100 billion than $20 billion.
Berkshire can't increase its stakes in the Japanese stocks by 5x as things stand now. The conglomerate initially agreed to keep its holdings below 10% of each company's outstanding shares. Buffett wrote in the latest shareholder letter that this ceiling has been increased moderately, but Abel probably won't be able to buy as much of Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo as he'd like.
Good picks for other investors, too
While Berkshire can't scoop up much more of these Japanese stocks, other investors can. I think they're good picks for the same reasons Buffett and Abel like them.
All five stocks continue to trade at attractive valuations. Sumitomo looks especially cheap, with its trailing-12-month price-to-earnings ratio of 8.12.
As mentioned previously, these Japanese trading houses offer solid dividends. Marubeni has even more than tripled its dividend payout over the last three years. Mitsui has more than doubled its dividend during the same period.
Like Berkshire Hathaway itself, Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo provide a tremendous amount of diversification as well. Buying these Japanese stocks isn't too different than investing in an exchange-traded fund (ETF) that owns stocks in multiple sectors.
Aggressive growth investors might not be interested in these soga shosha stocks. However, investors willing to patiently wait for steady growth should consider buying shares of one or more of the Japanese trading houses. When Buffett and Abel are so impressed with specific stocks that they want to own them for decades, it's worth paying attention.
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Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
