If you’re looking for new additions to your stock portfolio, you can borrow a few picks from Warren Buffett’s Berkshire Hathaway isn’t a bad idea. After all, he is not called the Oracle of Omaha for nothing.
On the other hand, just because Berkshire currently owns a particular stock doesn’t necessarily mean that Buffett would choose to buy it at this time. Buffett even openly admits that not every choice he and his team make ultimately works out as hoped.
So here we take a closer look at two Buffett stocks you should buy ASAP, and one Berkshire Hathaway stock you might want to steer clear of for now.
Buy Bank of America
It’s rarely mentioned, but bank of America (NYSE: BAC) is Berkshire’s second-largest holding company, right behind it Apple. The fund owns just over 1 billion BofA shares with a combined value of $41 billion, which makes up 10% of Berkshire’s stock portfolio.
Granted, most investors recognize that this is a difficult time for all banks, including Bank of America. High interest rates are causing potential borrowers to hesitate, while delinquencies and defaults on existing loans are increasing.
BofA’s provision for credit losses was increased last quarter to $1.3 billion, up from $1.1 billion in the fourth quarter and significantly higher than the first quarter 2023 loss provision of $931 million. Net income also fell from $0.94 per share to just $0.83 during the first quarter, underscoring the current headwinds and industry headwinds.
Lost in all the noise, however, are a few important (and related) details. First, none of the current banking challenges are something the industry has not seen and survived before. And second, everything currently working against Bank of America and its peers is reliably cyclical.
We are probably also nearing the end of the downside of the cycle. That’s why BofA shares are knocking on the door of their 52-week high late last month – investors seem to understand this reality. That’s why they aren’t shocked by the recent wave of less-than-stellar quarterly results.
The good – and somewhat surprising – news is that you can get into this stock while the forward-looking dividend yield is a healthy 2.4%, and while the stock is attractively priced at only about 12 times this year’s expected earnings per share. Given the likelihood of new economic strength taking shape in the near future, the market is reluctant to let this top stock remain so cheap for so long.
Buy Occidental Petroleum
On the surface, Western petroleum (NYSE:OXY) looks like just another oil and gas company, which might make you wonder why Buffett is seemingly so obsessed with it; Berkshire just purchased another 3 million shares, increasing the fund’s holdings to more than 250 million shares. The $15 billion position in Occidental is now not only Berkshire Hathaway’s sixth-largest stock position, but also amounts to almost 29% of Occidental Petroleum itself.
What gives? After all, there are plenty of other attractive energy names that pay a much larger dividend than Oxy.
The answer to the question is twofold.
First and foremost, Occidental is not just an oil name. It’s a (very) well-managed team led by an industry veteran who understands the importance of owning the right, cost-effective assets and investing wisely in their development. As Buffett spoke of CEO Vicki Hollub in his most recent letter to Berkshire shareholders:
Under Vicki Hollub’s leadership, Occidental is doing the right things for both the country and its owners. No one knows what oil prices will do in the next month, year or ten years. But Vicki knows how to separate oil from stone, and that is an unusual talent, valuable to her shareholders and to her country.
The second part of the answer to the question is the other business that Occidental is quietly building. As Buffett also noted about Oxy in his most recent letter to Berkshire Hathaway investors, “We particularly like the vast oil and gas reserves in the United States, as well as its leadership in carbon capture initiatives. “
Carbon capture is (literally) the removal of polluting carbon from the atmospheric air. This technology is not only good for the environment, but could extend the planet’s oil consumption despite the advent of cleaner renewable energy sources. That’s a key reason why market research firm Global Market Insights believes the emerging carbon capture industry will grow at an annual rate of 19% through 2032.
Given that Occidental is a demonstrable leader in carbon capture, it is well-positioned to benefit from the impending growth of this market.
Avoid Moody’s
However, not every current share in Berkshire Hathaway is a name that Warren Buffett – if given the choice – would choose to buy today.
To take Moodys (NYSE: MCO) as an example. While Berkshire has done well with this pick, in which it has had a stake for more than a few decades (although it eventually halved the position after the subprime mortgage collapse in 2008), the stock is currently overpriced by some different standards.
As a refresher: Moody’s is a corporate credit rating agency. You’re probably even familiar with the bond rating system (from Aaa to C). The company also does other types of investment research and risk assessment, but its credit risk scoring business is its main profit center. It’s not a bad business to be in either. The competition is surprisingly light and Moody’s defends its position quite well.
But this is also a business where problems can quickly overtake you and bite into your bottom line as both consumers and businesses look for ways to tighten their belts. If that kind of thinking is on the horizon in the shadow of surprisingly persistent inflation, Moody’s is vulnerable.
And Moody’s shares may even be right more vulnerable to such problems. Not only are stocks uncomfortably expensive at nearly 40 times expected earnings per share this year, but even the generally optimistic analyst community disagrees with the idea that more gains are in store in the near term. Analysts’ current consensus price target of $409.62 is just slightly below the stock’s current price.
That’s not to say that Moody’s isn’t a property outright, or that you should sell your interest if you already own it. However, from a risk versus return perspective, this is the wrong economic environment and too rich a valuation to take such risks. That’s especially true when there are other, more attractive options to choose from.
Should You Invest $1,000 in Bank of America Now?
Consider the following before buying shares in Bank of America:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Bank of America wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $830,777!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Bank of America, Berkshire Hathaway and Moody’s. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
2 Warren Buffett Stocks to Buy in June Hand Over Fist, and 1 to Avoid was originally published by The Motley Fool
