Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is known for its massive stock portfolio, which includes dozens of common stock holdings, many of which were hand-selected by legendary investor Warren Buffett himself.
To be fair, a solid investment case can be made for almost all of them. Buffett tends to invest in stocks with a sustainable competitive advantage, attractive valuations and other clearly identifiable reasons why they are attractive investments. However, some are currently much more attractive than others. Here are two stocks in particular from Berkshire’s portfolio that are worth a closer look, and one that I’m staying away from even though it’s a favorite of Warren Buffett.
A very profitable bank with interesting potential
Capital one financial (NYSE: COF) is currently an interesting banking stock and is one of the few major banks currently trading for less than book value.
Although Capital One is best known for its credit card business, it is a full-service bank with an extensive branch network in the Washington, DC metro area. Due to the high-interest nature of the credit card industry, Capital One has a net interest margin of 6.7% – more than double what most other major banks produce. Additionally, as one of the few branch banks offering high-yield savings accounts and CDs, the company has grown its customer deposits 7% year over year. There is certainly some recession risk in the credit card industry, but Capital One’s failure rate is reasonable and the bank has sufficient reserves to cover potential losses.
Perhaps most importantly, Capital One is planning an acquisition Discover financial services (NYSE:DFS) in an all-stock deal. Not only will this make Capital One’s credit card business much larger, but it will also give Capital One its own payments network, ultimately making the bank much less dependent on Visa and Mastercard. Management expects $2.7 billion in synergies from the deal by 2027, with much of that coming from network savings.
A leader with a superior cost structure
Ally financially (NYSE: ALLY) is a leading auto loan provider with a fast-growing online banking business. Berkshire owns 9.5% of Ally, and there are plenty of reasons why Buffett could be a fan.
For starters, Ally has several competitive advantages, including relationships with more than 22,000 auto dealers, a high degree of automation, and the superior cost structure associated with online banking versus branch banking. It’s also a high-margin business, as the average retail car loan has an interest rate of 10.6%. With a down payment of around 4% and a net depreciation rate of less than 2%, it’s easy to see why this can be such a profitable venture.
Ally is also a fairly cheap bank stock, with shares trading 25% below its 52-week high and a price-to-earnings ratio of just 8.8.
This Buffett favorite is not for me
It’s clear that Buffett is a fan of Western petroleum (NYSE:OXY)as he has been buying the stock regularly in recent years, and Berkshire now owns more than 27% of the oil company. But it’s a stock I like to watch from the sidelines.
For starters, the company is very sensitive to the price of oil, even compared to other major oil companies, and has businesses because its main focus is on extracting oil from the ground. This is why Occidental has underperformed peers recently, as crude oil has fallen more than 15% since mid-year.
Debt is also an issue that makes me nervous, and while management is doing a good job reducing debt, it could hurt cash flow in the near future.
Another Buffett stock could be a better option for you
As a final thought, if you can’t decide which “Buffett stocks” are best for you, there’s nothing wrong with buying Berkshire Hathaway itself and getting exposure to all of them. Another reason I don’t really want to invest in Occidental is that Berkshire is one of my largest stock investments and therefore I already have significant indirect exposure to the oil company.
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Ally is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel holds positions at Ally Financial and Berkshire Hathaway. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Discover Financial Services and Occidental Petroleum. The Motley Fool has a disclosure policy.
2 Warren Buffett Stocks to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool
