Warren Buffett has generated enormous profits for the long-term shareholders of the American economy Berkshire Hathaway over the years. The legendary investor’s buy-and-hold style has also inspired countless investors to try to follow his strategy. There’s no better way to learn how to do this yourself than by paying attention to the stocks the conglomerate is buying and selling.
Berkshire Hathaway’s portfolio today includes holdings in more than three dozen companies selected either by Buffett himself or one of his investment representatives. And among them, three Motley Fool contributors believe it Amazon (NASDAQ: AMZN), Ultimate beauty (NASDAQ:ULTA)And American Express (NYSE:AXP) are particularly excellent purchases at the moment.
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Jennifer Saibil (Amazon): It’s hard to believe that just two years ago, investors were worried about Amazon’s future. Sales growth was slowing, the company had just reported its first annual net loss in more than a decade, and things were starting to look stale.
What a difference two years make. In late 2022, ChatGPT launched its generative artificial intelligence (AI) platform, changing the world and breathing new life into the biggest tech companies, including Amazon. Since then, Amazon has released a range of AI solutions, and its AI business already has a multi-billion dollar run rate.
That’s what’s already happening, but the future AI possibilities are enormous. CEO Andy Jassy continues to talk about the expected shift in enterprise IT spending to the cloud, and it’s no small shift: Only 10% of information technology (IT) spending is currently in the cloud. He expects a turning point when the transition accelerates, and Amazon will be positioned to benefit greatly. It is already benefiting from accelerated revenue growth from Amazon Web Services (AWS), which reached 19% in the third quarter. Customers who want to participate in the generative AI revolution realize they need to step into a cloud platform like AWS.
While the major investments are in AI solutions for AWS customers, the company is using the technology across its business. It now offers tools for third-party sellers that can create entire marketing campaigns based on prompts and promotional videos from a single image. It uses its vast amount of data and machine learning to power its advertising program, which continues to outpace other segments in revenue growth.
Lesson learned: don’t underestimate Amazon. It has incredible momentum right now and its AI platform is the wave of the future. You can buy the stock now at its lowest valuation in a long time, and if you hold onto the stock through the inevitable short-term ups and downs, you should be well rewarded in the long run.
Jeremy Bowman (Ulta Beauty): Earlier this year, Berkshire Hathaway bought shares of cosmetics retailer Ulta Beauty for the first time, and in many ways it looks like a classic Buffett stock.
Ulta is a clear leader in its niche, with more than 1,400 stores across the country — not including the approximately 800 store-in-store locations nationwide. Goal locations – rival peer Sephora. However, the stock has retreated this year as the company’s revenue growth slowed, giving investors a chance to get into this old winner at a discount.
Although Ulta’s business is maturing, the stock still has growth potential. Interest rates are forecast to fall, which in turn is expected to improve consumer confidence – and that should help fuel a recovery for Ulta and its shares. Additionally, the company revealed at its recent Investor Day conference that it planned to accelerate the pace of new store openings, with a more ambitious long-term goal of increasing its footprint to more than 1,800 stores. The company is also seeing strong adoption of its loyalty program, which is expected to reach 50 million members by 2028.
As a company, Ulta also enjoys a number of competitive advantages. Most of the full-service stores have hair salons, giving customers another reason to visit. That’s also a service that e-commerce rivals can’t offer. Moreover, the stores are much larger than those of other pure beauty retailers. Essentially, they are superstores with a wide range of products and brands, making Ulta a one-stop shop for beauty shoppers.
Right now, Ulta offers investors excellent value at a price-to-earnings ratio of 15, and the company plans to aggressively buy back shares under the new $3 billion share repurchase program it announced last month. It’s no surprise that Berkshire Hathaway took advantage of the stock discount to pick up shares.
John Ballard (American Express): American Express has been an important part of Berkshire Hathaway’s portfolio for more than thirty years. The strong growth this year explains why Buffett continues to hold his shares.
American Express has a solid business strategy of using cardholder benefits and special offers to attract new customers, who in turn will use their cards regularly and generate merchant fees. This spend-oriented business model should continue to flourish as the economy grows in the long term.
In the third quarter, sales reached a new high, growing 8% year-on-year, and this sales growth also drove strong profit growth. Management has raised its full-year revenue and earnings expectations and now expects 2024 earnings per share to be between $13.75 and $14.05.
Buffett attaches great importance to the brand of the financial company. American Express’s appeal is reflected in its success in winning younger customers. Millennials and Gen Z consumers are the company’s fastest-growing cohorts, accounting for 80% of new U.S. accounts acquired for its gold card last quarter.
Shares of American Express trade at a price-to-earnings ratio of about 21, which is on the high side for a financial services company but still within the stock’s historical trading range. If consumer spending picks up, it could spark a fire in cardholder spending. With analysts expecting the company’s earnings to grow at an annual rate of 15% over the next five years, investors who buy the stock now can earn excellent returns.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of Motley Fool Money. Jennifer Saibil holds positions at American Express. Jeremy Bowman has positions in Amazon and Target. John Ballard has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway, Target and Ulta Beauty. The Motley Fool has a disclosure policy.
The 3 Smartest Buffett Stocks to Buy Now was originally published by The Motley Fool
