Warren Buffett is widely regarded as the greatest investor of our time. Since he took over management of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 1965, shares of the nearly $900 billion multinational holding company achieved a compound annual growth rate of 19.8%. For comparison: the S&P500 has delivered a total annual return of 10.2% over the same period, suggesting it is worthy of this title.
Given Buffett’s outsized success, cautious investors consistently keep an eye on Berkshire’s nearly $400 billion investment portfolio to see which stocks the Oracle of Omaha believes can beat the market. With that in mind, here are three stocks that reflect his sustainable investment strategies and promise long-term growth for shareholders.
1. Amazon
While Berkshire’s investment in Amazon (NASDAQ: AMZN) was created by one of Buffett’s appointed portfolio managers and not by Buffett himself, the company embodies many of his philosophies about a winning stock.
One key metric where Amazon excels is operating profits, a calculation of a company’s direct profits from its core businesses. Buffett prefers this metric when analyzing a company like Amazon because it excludes volatile unrealized capital gains and losses from his investments.
For Amazon’s most recently reported quarter, the company generated a record operating profit of $15.3 billion, representing an impressive 69% year-over-year increase. In addition to the earnings growth, the balance sheet is in great shape, with $27.4 billion in net cash (cash and cash equivalents minus total debt).
Despite its healthy cash position, Amazon does not offer dividends or regular share buybacks. As a result, shares outstanding continue to increase incrementally due to stock-based compensation, up 5% over the past five years. Warren Buffett prefers buying back shares at “appreciating” prices over stock dilution because investors will lose their ownership percentage over time.
Instead of returning capital to shareholders, the company is investing heavily in artificial intelligence (AI), which is already showing up in its Amazon Web Services (AWS) division. Specifically, management forecast annual revenue of $100 billion for AWS in 2024, up from $90.8 billion in 2023.
As for Amazon’s valuation, it seems expensive at first glance, with a trading value of 43 times free cash flow. However, the stock is arguably undervalued when you consider that the company has always traded at an expensive valuation, with a 10-year median of 63 times free cash flow.
2. American Express
Berkshire started his position American Express (NYSE:AXP) in 1991 and completed the $1.3 billion investment in 1995. The investment has paid off well for Berkshire, despite the fact that no dividends were reinvested or additional shares were purchased.
It’s now worth $34.7 billion and will likely generate about $409 million in dividends this year alone. In addition, Berkshire’s ownership stake has grown from approximately 10% to 21% through share buybacks.
With returns like these and the lack of further capital investment in Berkshire since 1995, investors would be wise to take a closer look at the stock’s prospects, but American Express isn’t slowing down. The banking and payments company reported impressive financials for the first quarter of 2024, including total revenue of $15.8 billion and diluted earnings per share (EPS) of $3.33, representing a year-over-year increase of 11% respectively and 39%.
Furthermore, management reaffirmed its confident outlook for the remainder of 2024, forecasting revenue growth between 9% and 11% and diluted earnings per share growth between 13% and 17%.
As previously mentioned, management is prioritizing returning capital to shareholders through dividends and share repurchases. The company has regularly paid and increased its dividend since 1989, with a current quarterly payout of $0.70 per share, which equates to an annual yield of 1.2%.
And management has repurchased nearly 14% of outstanding shares over the past five years, with authorization to repurchase an additional estimated 95 million shares from the current 719 million.
One area of concern for American Express is growing loan loss provisions – a non-cash expense for expected losses that are unlikely to be recoverable – as high interest rates continue to weigh on consumers. This metric is on the rise for American Express, reaching $1.3 billion in the first quarter, a year-over-year increase of 18%.
During the company’s most recent earnings call, Chief Financial Officer Christophe Le Caillec said: “We expect these delinquencies and charge-offs to remain high, with continued modest increases through 2024.”
Despite macroeconomic headwinds, American Express’ growth and capital allocation strategy favors long-term shareholders. This explains why Berkshire’s ownership stake in American Express has doubled since 1995, and it has recouped its entire investment, then some of it through dividends.
3. Berkshire Hathaway
Often the most successful investments are hidden in plain sight. So for the last stock, consider Buffett’s all-time favorite: Berkshire Hathaway.
Berkshire has a diverse portfolio, with majority stakes in more than 60 subsidiaries, including well-known brands such as Geico and Dairy Queen. Together, these companies achieved operating income of $11.2 billion in the first quarter of 2024, an increase of 39% year over year.
In Berkshire’s insurance business, the company receives premiums from its customers in advance. This cash, known as the float, is available for investment until it is needed to pay out policyholder claims. As a result, Berkshire had $189 billion on hand for potential acquisitions or equity investments at the end of the first quarter of 2024.
In the short term, Buffett appears content to keep most of Berkshire’s cash in Treasury bonds — a short-term security backed by the U.S. Treasury Department with a term of one year or less — because of their higher-than-average yields. from 5% to 5.4%.
While some investors may be critical of Buffett’s strategy of sitting on a pile of cash, this ensures that the company can benefit in the event of a financial downturn in the markets.
Buffett wrote on the subject in his most recent annual letter to shareholders: “During the panic of 2008, Berkshire generated cash from its operations and did not rely in any way on commercial paper, bank lines or debt markets. economic paralysis, but we were always prepared for that.”
He then summarized his thoughts on his fiscally conservative approach: “Berkshire is built to last.”
Are These Buffett Stocks Worth Buying?
Given Warren Buffett’s unparalleled track record, investors would be wise to model their investment strategies and portfolios after him. These three very different stocks offer a combination of growth, consistent income and protection against a market downturn, making each of these market-leading companies worthy of any portfolio.
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American Express is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Collin Brantmeyer has positions in Amazon, American Express and Berkshire Hathaway. The Motley Fool holds and recommends positions in Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
3 No-Brainer Warren Buffett Stocks to Buy Now was originally published by The Motley Fool
