Warren Buffett’s strategy for selecting stocks may appear outdated, yet its effectiveness is undeniable. Over time, his Berkshire Hathaway consistently surpasses the broader market, a trend unlikely to change soon. The conglomerate holds shares in a variety of companies, offering investors the option to buy Berkshire shares or choose individual stocks from its portfolio. Here, we delve into three of the most promising stocks currently part of Berkshire Hathaway’s holdings.
1. Chevron
Despite the rise of cleaner energy alternatives, the oil and gas sector is far from obsolete. In fact, it’s projected to continue expanding. The Standard & Poor’s report predicts that by 2050, liquid fuels such as gasoline, oil, and diesel will remain the primary energy source globally. The increase in alternative energy won’t match the growth in demand driven by population growth and technology proliferation.
Enter Chevron, a major integrated player in the sector. It engages in exploring, drilling, and refining both onshore and offshore. Acknowledging the need to adapt, Chevron is also exploring renewables, despite the clean-energy future being decades away.
Buffett’s interest in Chevron isn’t solely due to its potential longevity. The company offers an appealing dividend and attractive valuation, with the stock trading at 12 times its expected earnings over the next four quarters and a forward-looking dividend yield of 4.5%. Finding a better yield at this valuation with such low risk is challenging. Additionally, Chevron has a consistent history of increasing its dividend payouts for 37 consecutive years, supported by its diverse profit centers.
2. American Express
Recently, some analysts, including Bank of America, have shown skepticism toward American Express, downgrading it from a buy to neutral due to reduced consumer spending. Concerns also arise about investors gravitating toward cheaper alternatives like Synchrony Financial or Capital One Financial.
While these concerns are valid, most investors focus on the long-term potential rather than short-term fluctuations. Given American Express’ successful track record, its recent stock weakness presents an opportunity rather than a warning.
American Express is known primarily as a credit card company, but it’s more accurately a manager of perks and rewards programs linked to its charge cards. Cardholders pay up to $695 annually for benefits like shopping credits and access to exclusive services. This value proposition remains strong even with slight consumer spending slowdowns.
American Express earns revenue from processing card transactions, complemented by its rewards programs. Notably, Buffett’s recent divestment from Bank of America has made American Express Berkshire Hathaway’s second-largest holding, with over 152 million shares worth $37 billion. This stake represents more than 12% of Berkshire’s total equity portfolio.
3. Amazon
Consider Amazon if you have $1,000 to invest without immediate need for the funds. While seemingly an unusual choice for Buffett, who typically avoids complex tech stocks, Amazon aligns with his investment principles of having a competitive advantage and promising long-term growth prospects.
Amazon’s success stems from its adaptability. Initially an e-commerce site, it has evolved into a major advertising platform. Its high-margin ad business could potentially surpass merchandise sales in profitability. The numbers speak for themselves, with Amazon’s revenue expected to increase by over 10% this year and the next.
Although Berkshire Hathaway’s stake in Amazon is relatively small, owning 10 million shares worth under $2 billion, Buffett’s decision to maintain this investment since 2019, despite initial skepticism, is telling.
Summary:
Warren Buffett’s investment philosophy remains effective, as evidenced by Berkshire Hathaway’s consistent market outperformance. The conglomerate offers investors diverse opportunities, including Chevron, American Express, and Amazon. Chevron benefits from long-term growth in the oil sector, American Express capitalizes on its rewards programs, and Amazon continues to expand its influence in e-commerce and advertising. Buffett’s strategic choices reflect his commitment to companies with sustainable competitive advantages and growth potential.
