Feel free to poach a few of the Oracle of Omaha’s picks. His track record speaks for itself.
Warren Buffett’s approach to picking stocks may seem antiquated. Nevertheless, it works. That is to say, given enough time, Buffett’s Berkshire Hathaway reliably outperforms the broader market. This isn’t apt to change in the foreseeable future, either.
The conglomerate owns shares of dozens of diverse companies and you can too by buying Berkshire shares, but if you’d rather own individual stocks than an entire basket of them, that’s an option, too. Simply pick and choose the most compelling names held by Berkshire at any given time.
To this end, here’s a closer look at three of your best bets currently held in Berkshire Hathaway’s portfolio.
1. Chevron
Contrary to a growing assumption, the oil and gas business isn’t dying. If anything, it’s still growing, despite the advent of cleaner energy alternatives. Standard & Poor’s forecasts that even as far down the road as 2050, liquid fuels (gasoline, oil, diesel) will still be the planet’s single-biggest source of energy. Alternative energy’s growth just won’t be able to keep up with demand growth stemming from population growth and the continued proliferation of power-consuming technology.
Enter Chevron (CVX 1.30%).
There’s nothing especially unique about it. It’s an integrated major player, meaning it’s not only big, but it does everything from exploring to drilling to refining, onshore as well as offshore. Recognizing it needs to adapt and evolve even if the inevitable clean-energy future is decades down the road, the company’s also tinkering with renewables.
Its likely longevity isn’t the only reason Buffett’s a fan of this energy giant, however. Chevron also offers a very attractive dividend at an attractive valuation. The stock’s currently priced at only 12 times its expected per-share earnings for the coming four quarters and boasts a forward-looking dividend yield of 4.5%. You’d be hard-pressed to find a better yield at this valuation with this low degree of risk.
This dividend also grows reliably, by the way. While Chevron’s earnings ebb and flow with the price of crude oil, this company’s big enough — and its profit centers are diverse enough — to support 37 consecutive years of annualized dividend payout growth.
2. American Express
A handful of analysts have turned more than a little sour on credit card company American Express (AXP 1.43%) of late. Bank of America recently downgraded it from a buy to a neutral rating, for instance, citing crimped consumer spending. BofA analyst Mihir Bhatia also fears investors may start steering clear of American Express in favor of similar but cheaper alternatives like Synchrony Financial or Capital One Financial.
And to be fair, these aren’t unreasonable worries.
Yet, most own stocks based on their likely long-term future rather than their near-term outlook. And given American Express’ track record of success, the stock’s relative weakness since May is more of an opportunity than it is a warning.
You know AmEx as a credit card outfit. That categorization isn’t quite accurate, however. Its role as a payment middleman is arguably more of a means to an end. Its core business is actually managing perks and rewards programs centered around its charge cards. Some cardholders are willing to pay up to $695 per year in exchange for credits toward shopping, entertainment, and hotel stays, in addition to access to airport lounges, travel agents, preferred car-rental service, and trip insurance. Its cards’ annual fees may more than pay for them, particularly if the holder is a regular user of their AmEx card. That’s not apt to change in the long run even if consumer spending slows down a bit in the short run.
Of course, AmEx collects roughly 10 cents worth of revenue for every card-based transaction it facilitates (as well as a small percentage of the transaction total) … the ultimate goal of its generous perks programs.
This might help: Thanks to Buffett’s exit of a sizable portion of its stake in Bank of America, American Express is now Berkshire Hathaway’s second-biggest holding. The fund holds nearly 152 million shares collectively worth $37 billion. That’s more than one-fifth of the American Express company’s total value, and over 12% of Berkshire’s total equity portfolio.
3. Amazon
Finally, add Amazon (AMZN 0.52%) to your list of Warren Buffett stocks to buy if you’ve got an extra $1,000 that you know you won’t be needing anytime soon.
It’s a seemingly unusual pick for Berkshire. Buffett typically isn’t a fan of technology stocks with business models that can not only be difficult to understand but with products and services that can be readily upended by competitors.
Except, given some thought, Amazon isn’t a terribly surprising Buffett pick after all. It exhibits a couple of the key qualities the Oracle of Omaha recommends for any prospective investment. Those are companies with a clear competitive advantage and companies with compelling — but plausible — long-term growth prospects. Amazon fits both of those bills very nicely, even if it’s adapting to do so. For example, Amazon entered the cloud computing business several years ago because it knew there would eventually be a massive need, and it knew it could deliver such a service as well as any other outfit could.
Amazon.com itself is also evolving. At one point it was strictly an e-commerce website. Now it’s an advertising platform that just so happens to offer online shopping. It’s not inconceivable that its high-margin ad business could one day produce more net operating income than selling merchandise does (if it’s not already doing so).
The proof is in the numbers. Amazon is expected to grow its top line to the tune of over 10% this year as well as next year, and then repeat the feat at least for at least the next few years after that.
Amazon isn’t a huge Berkshire Hathaway holding. It only owns 10 million shares worth a little less than $2 billion. That’s less than 1% of Amazon itself, as well as less than 1% of Berkshire’s total value.
Still, Buffett’s willing to stick with this ticker that prior to 2019 next to nobody expected him to purchase. That alone speaks volumes.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Synchrony Financial 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. American Express 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 has positions in and recommends Amazon, Bank of America, Berkshire Hathaway, Chevron, and S&P Global. The Motley Fool has a disclosure policy.
