Warren Buffett has long been a favorite of investors. He took Berkshire Hathaway (BRK/A, BRK/B), a small textile factory he purchased and made it into an investment empire. Now “Buffett stocks” gain investor interest simply because of the stake he takes in these companies. Millions follow his annual letter to shareholders. His annual shareholder meeting in Omaha, Nebraska every May has evolved into a massive media event.
Although BRK.A is a stock itself, the holdings have turned the company into a de facto Warren Buffett exchange-traded fund. This portfolio runs the gamut of industries. It can include old-line companies in mundane but profitable sectors. In recent years, it has also taken on some of the biggest names in tech, an industry Buffett once eschewed. Moreover, Buffett has turned much of the stock picking to deputies such as Ted Weschler and Todd Combs.
However, as Buffett approaches his 90th birthday and he transitions the buy and sell decisions to others, these five stocks should serve Berkshire well for years, or perhaps, decades to come.
Amazon has become one of the more surprising Buffett stocks in many respects. At a forward price-to-earnings ratio of about 63.9, AMZN stock is not exactly the value play Warren Buffett typically pursues. While its retail footprint creates the impression of dominance, its profit margins remain very low. Consequently, retail does not drive the majority of earnings for the company.
Instead, Amazon Web Services (AWS) earns the majority of company profits. In the third quarter, AWS revenues grew by almost 35%. It also made more than $2.3 billion on the quarter on nearly $9 billion in revenue. Amazon’s retail operations earned less than half of that profit on almost $61 billion in revenue. Investors should also not forget the artificial intelligence-driven smart speakers and the ad sales that also help to boost profits.
Wall Street only expects 2.5% profit growth this year. However, over the next five years, analysts expect earnings to increase by 50.3% per year on average. This is unheard of growth for a company with a market capitalization of almost $870 billion. AWS makes this possible, and this should serve Berkshire well in the coming years as cloud growth helps to drive this investing giant higher.
American Express has long remained one of the core Buffett stocks. Today, it benefits as e-commerce helps to drive an increasingly cashless society.
Admittedly, AmEx might seem like a strange choice in today’s credit card world. For now, two other Buffett stocks, Visa (V) and Mastercard (MA), hold larger market shares in the credit card processing market. Moreover, credit cards long ago supplanted its venerable traveler’s check business. In 2016, it also took a hit when it lost its card exclusivity at another Buffett-owned company, Costco (COST).
However, despite the seeming dominance of Visa and Mastercard, AXP still grew revenues by 8.4% in the last quarter. Moreover, in the market of credit card processing stocks, investors tend to receive what they buy.
For now, AXP stock maintains a forward P/E ratio of 13.3. Analysts also forecast profit growth of 11.5% this year and 10.3% next year. When the valuation and growth are measured against one another, American Express comes out the clear winner.
Furthermore, as InvestorPlace’s Mark Hake mentioned, American Express announced a plan to buy back 120 million of the 832 million AXP shares outstanding. He believes this will lead to at least a comparable lift in the stock, and I agree.
DaVita is a familiar name to those who experience kidney failure. It provides dialysis to over 200,000 of the estimated 468,000 Americans who depend on dialysis to stay alive. It also runs dialysis clinics in nine additional countries across the world, including China, Brazil, Germany and the United Kingdom. While few like to discuss the grim realities of dialysis, it makes itself a Buffett stock by meeting this vital need.
Moreover, the aging of the baby-boom generation brings an estimated 10,000 people per day into the Medicare system. This reality will continue to bring more patients into DaVita’s dialysis clinics. This trend is likely one big reason why Wall Street predicts average annual earnings increases of 19.2% per year over the next five years. Like Buffett, ordinary investors can buy this growing income stream for less than 12.6 times forward earnings.
However, investors have begun to see what Buffett saw in this company. Earlier this month, its third-quarter earnings beat estimates by 29 cents per share. This took DVA stock higher by almost 13% in a single day.
Fortunately, traders can still buy in at a low valuation. As long as baby boomers continue to enter the Medicare system in large numbers, DVA stock should keep moving higher.
Occidental Petroleum has become one of the newest Buffett stocks. He bought 7.4 million shares in the Houston-based oil company, a relatively small stake by Buffett standards. This comes to a value of about $288 million.
However, Barron’s labels OXY stock as a “controversial” pick. Upstream oil companies have sold off in recent months as both the oil and natural gas market keep pointing to a supply glut. As a result, both profit and profit estimates continue to fall.
Buffett played a role in Occidental’s purchase of Anadarko Petroleum earlier this year. Moreover, he has said he likes to buy when he sees “blood in the streets.” OXY stock does not trade at such a level. Still, it has fallen by almost 50% from its 52-week high.
Furthermore, for all of the talk about alternative energy, fossil fuels remain the world’s primary fuel source. Occidental also operates midstream and chemical businesses, so it can still earn revenue in more uncertain oil markets. Even amid falling profits, analysts expect revenue to rise by 8.9% this year and 22.1% in 2020.
Admittedly, OXY stock requires more faith in Buffett’s instincts than other picks. However, as more of the world continues to industrialize, rising demand for oil and gas should take OXY stock higher long term.
StoneCo is not a familiar name to most Americans. However, this Sao Paulo, Brazil-based firm hits on a familiar theme in Buffett stocks — an interest in financial technology, or fintech.
Many of its services resemble what Square (SQ) offers in the U.S. and other countries. Its products help to enable e-commerce within Brazil, providing technology solutions to digital merchants through in-store, online and mobile channels. This happens through a cloud-based end-to-end technology platform.
It also offers working capital to both small and medium-sized businesses in the South American country. StoneCo now serves more than 360,000 clients and it also has plans to enter the micro merchant space. This expansion led to 60.6% growth in total payment volume, with overall sales increasing by 68.6% in the quarter ending in June.
At about 36.8 times forward earnings, it trades at a higher valuation than most Buffett stocks, and may not be “his” direct pick. However, I think Buffett’s team sees in STNE stock the same cloud-based potential he discovered with Amazon.
Moreover, with Wall Street expecting 94.6% earnings growth this year and 43.1% the next, the somewhat-higher P/E ratio seems worth the cost. As the use of fintech continues to expand across Brazil and the rest of the world, STNE stock should rise along with the industry.
As of this writing, Will Healy is long BRK.B stock.