This Billionaire Warren Buffett Disciple Has 70% of His American Portfolio in Just 2 Stocks

Many people try to emulate Warren Buffett’s investing strategies, but it isn’t easy to generate the same level of success. One who has done pretty well also happens to be someone that Buffett’s right-hand man Charlie Munger entrusted his savings to: Li Lu. The Chinese-born value investor runs a fund called Himalayan Capital Management, which was started a few decades ago with the help of Munger (now deceased).

This Warren Buffett disciple runs a concentrated portfolio, especially with his United States-listed stocks. In fact, as of the Himalayan Capital fund’s latest update, it had approximately 70% of its American portfolio in just two stocks: Bank of America (BAC 3.35%) and Alphabet (GOOG -1.10%). What is it about these two stocks Li Lu likes so much? Should you invest alongside Li Lu and buy these stocks?

1. Bank of America: Diversified global banking

Just under 30% of Li Lu’s portfolio of United States stocks (foreign stock holdings are not required to be publicly reported) is in Bank of America. One of the largest banks in the world offers individuals and commercial customers a diversified set of financial services. It has four reporting segments: consumer banking, wealth management, global banking, and global markets. Each of these divisions generated over $1 billion in net income last quarter and the four together totalled $6.7 billion.

Bank of America continues to add customers to its banking division, onboarding 245,000 accounts last quarter, and it remains one of the premier investment banks in the world. While not a hypergrowth stock, this allows Bank of America to run a consistent operation year in and year out. Li Lu likely owns the stock because it is undervalued and returns capital to shareholders.

The stock trades at a price-to-book (P/B) of just 1. P/B is the most useful valuation metric for a bank, as it tells an investor the price of a stock versus its net asset value. Bank of America currently has a return on equity (ROE) of 9% and has hovered around 8% to 12% in the last few years, which is the return it is getting on this book value. With these returns, Bank of America pays shareholders a dividend that yields 2.7%. It has repurchased stock to bring shares outstanding down by 25% in the last 10 years.

These consistent profits along with returning capital to shareholders through share buybacks and dividends are likely why Li Lu has made Bank of America such a large position in his portfolio. This blue-chip stock should continue to provide solid returns for shareholders going forward.

BAC Dividend Yield Chart

BAC Dividend Yield data by YCharts.

2. Alphabet: An undervalued Magnificent Seven stock?

The other stock making up close to 40% of Himalayan Capital’s United States portfolio is a little more exciting than a diversified bank. Enter Alphabet, the Magnificent Seven technology giant that owns Google Search, YouTube, and Google Cloud.

So why does Lu like the stock? While I don’t know for sure, I think it is due to its reasonable valuation and consistent growth. Alphabet’s price-to-earnings (P/E) ratio has remained below the market average for many years now. Even with the stock up 77% since the beginning of 2023, it still has a P/E of 27, which is just below the S&P 500 average. Although Lu first started buying shares in 2020 during the COVID-19 pandemic-market turmoil, he has not done so recently.

Despite almost always trading below the average S&P 500 earnings multiple, Alphabet is growing much quicker than the average company. Last year, its revenue grew 9% to $307 billion, and that was on top of 10% growth the year prior. Google Search is still growing quickly, along with fast growth from YouTube and Google Cloud. YouTube now makes up close to 10% of TV viewing in the United States and generated $9.2 billion in advertising revenue last quarter. Google Cloud hit $9.2 billion in revenue as well and is growing 26% year over year.

Alphabet looks to have many years of growth left ahead of it. At just under the market’s earnings multiple, investors should do just fine owning this stock alongside Li Lu.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Bank of America. The Motley Fool has a disclosure policy.


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