Warren Buffett hasn’t seen much to like in the stock market lately. The chairman of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has sold more shares than he bought in his company’s stock portfolio for eight consecutive quarters. That includes selling shares in some of the most profitable positions.
Although Buffett has reduced his holdings in some of Berkshire’s largest stock positions and sold smaller positions entirely, there are three top stocks he plans to hold indefinitely. Buffett describes these as “really wonderful” companies, and they may deserve a place in your portfolio.
American Express differentiates itself from most other credit card issuers by operating its own payment network. Banks typically partner with a third-party payment network such as Visa or MasterCard to process payments when someone uses or swipes their credit card. These two companies generate billions in revenue just by moving money from one account to another.
As its own network operator, American Express gets to keep all those swipe fees. They amounted to $8.8 billion last quarter, up 4% year over year, accounting for more than half of total revenue. That growth was somewhat disappointing as Amex’s business customers (about 30% of the total) lagged behind consumer and international cardholders.
But as network volume growth slows, the company is seeing more customers opt for premium cards with high annual fees. Card costs increased 18% year over year, reaching $2.2 billion. Net interest income is also a growing revenue stream, which rose 16% and surpassed the $4 billion mark last quarter.
The shift to more expensive cards is a major competitive advantage for American Express. It signals that it has a more affluent customer base that is less susceptible to cuts during economic slowdowns. This shift also attracts more merchants to partner with Amex to attract those big spenders, increasing the value of owning an Amex card.
Shares of American Express are up 45% so far in 2024. This has brought the price-earnings ratio (P/E) to approximately 18. The stock has spent much more time trading below that level than above it over the past decade, which may make investors hesitant to add shares at its current price. current price. Still, the company is solid and worth buying if share prices fall.
Coca-cola (NYSE: KO) is another of Buffett’s old holdings, founded in the late 1980s and early 1990s.
Coke has several competitive advantages that make it an attractive long-term investment for Buffett. First of all, the brand is iconic worldwide. And in addition to the product line of the same name, the company owns eleven other billion-dollar brands.
That brand strength is reflected in the company’s ability to raise prices during times of rapid inflation. Prices rose 10% year over year last quarter, although management notes that four percentage points came from markets experiencing intense inflation.
Another advantage is Coca-Cola’s global scale. This allows it to maximize the value of its supply chain and distribution agreements. It can easily test new products because it has the upper hand in negotiating shelf space with retailers. This has allowed it to increase its already dominant market share across the world.
Share prices have fallen from an all-time high reached earlier this year. They now trade at a reasonable estimate of 22 times forward earnings. That roughly corresponds to the average and is a reasonable price for the market leader.
Western petroleum (NYSE:OXY) is a relatively new addition to Berkshire’s portfolio. Buffett took a significant stake in the company when he acquired $10 billion worth of preferred stock in 2019 to help Occidental acquire Anadarko.
He has since acquired a large stake in the common stock, while Occidental has retired some of Berkshire’s preferred shares. It currently owns approximately 27% of Occidental’s outstanding shares.
The energy company is much more exposed to the oil price than other integrated operators. Its location in the Permian Basin in the southwest makes it a relatively cheap source of U.S. oil production.
The company recently expanded this position even further with the acquisition of CrownRock, which was completed in early August. Chief Executive Officer Vicki Hollub estimates the acquisition will increase free cash flow by $1 billion, as long as West Texas Intermediate’s crude trades around $70 a barrel.
Unfortunately, the price of oil has fallen significantly over the past six months, leaving Occidental in a precarious position given the amount of debt it took on to complete the CrownRock acquisition. The exposure to oil production has sent Occidental’s stock price down to levels it hasn’t seen since early 2022.
Interestingly, Buffett didn’t take the opportunity to buy shares at these low prices after buying them consistently for more than two years in a row. In his 2023 letter to shareholders, he wrote: “No one knows what oil prices will do in the next month, year or decade. But Vicki [Hollub] knows how to tell oil from rock, and that’s an unusual talent, valuable to its shareholders.” That makes Buffett’s lack of purchases in the past four months all the more surprising.
That said, it could be that Buffett is happy with Berkshire’s current ownership stake in the company, which is already quite substantial. He has said he has no interest in taking a controlling stake in the company.
Occidental’s current stock price of around $50 gives the company an enterprise value/EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of just 5.3. Even with the pressure on oil prices, that is an attractive price for the share. And if you think oil prices will recover, Occidental should see substantial benefits to its free cash flow and stock price as a result.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Amazon: If you had invested $1,000 when we doubled in 2010, you would have $22,292!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $42,169!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $407,758!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 4, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple, Mastercard and Visa. The Motley Fool holds positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends Occidental Petroleum and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
Warren Buffett is selling Apple and Bank of America, but here are three stocks he wants to hold forever was originally published by The Motley Fool
