Warren Buffett hasn’t seen a lot to like in the stock market recently. The chairman of Berkshire Hathaway (BRK.A) (BRK.B) has sold more stock than he bought in his company’s equity portfolio for eight consecutive quarters. That includes selling shares in some of its most profitable positions.
He started taking shares of Berkshire’s huge Apple position off the table at the end of last year, selling more than two-thirds of its stake during the past four quarters. Last quarter, he turned his attention to Bank of America as well. Since the end of June, he has sold 26% of what was Berkshire’s second-largest position.
While Buffett has been slashing his stakes in some of Berkshire’s largest equity holdings and selling smaller positions entirely, there are three top stocks he plans to hold indefinitely. Buffett describes these as “truly wonderful” businesses, and they may deserve a spot in your portfolio as well.
1. American Express
Buffett started building a position in American Express (AXP) in the early 1990s and hasn’t touched it in more than two decades.
American Express separates itself from most other credit card issuers by operating its own payment network. Banks typically partner with a third-party payment network like Visa or Mastercard to process payments whenever someone uses, or swipes, their credit card. Those two businesses generate billions in revenue just by making sure money moves from one account to another.
As its own network operator, American Express gets to keep all of 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 a bit disappointing because Amex’s corporate customers (about 30% of its total) lagged its consumer and international cardholders.
But while network volume growth is slowing, the company is seeing more and more customers opt for premium cards with high annual fees. Card fees increased 18% year over year, reaching $2.2 billion. Net interest income is also a growing revenue stream, rising 16% and topping $4 billion last quarter.
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The shift toward higher-end cards is a great competitive advantage for American Express. It indicates that it has a more affluent customer base that is less susceptible to cutting spending during economic slowdowns. This shift also attracts more merchants to partner with Amex to draw in those big spenders, increasing the value of holding an Amex card.
Shares of American Express have climbed 45% in 2024 so far. That has pushed its forward price-to-earnings ratio (P/E) to about 18. The stock has spent a lot more time trading below that level than above it during the past decade, which may make investors hesitant to add shares at the current price. Still, the business is solid, and it’s worth buying if shares pull back in price.
2. Coca-Cola
Coca-Cola (KO) is another longtime Buffett holding, established in the late 1980s and early 1990s.
Coke has several competitive advantages that make it an attractive long-term holding for Buffett. First of all, the brand is globally iconic. And on top of its namesake product line, the company owns 11 other billion-dollar brands.
That brand strength has shown up in the company’s ability to increase pricing amid rapid inflation. Its prices increased 10% year over year last quarter, although management notes four percentage points came from markets experiencing intense inflation.
Another advantage is Coca-Cola’s global scale. That enables it to maximize the value of its supply chain and distribution deals. It can easily test new products because it holds the upper hand in negotiating with retailers for shelf space. That has enabled it to increase its already dominant market share around the world.
Shares of the stock have backed off from the all-time high reached earlier this year. They now trade at a reasonable 22 times forward earnings estimates. That’s about in line with its average and is a reasonable price to pay for the market leader.
3. Occidental Petroleum
Occidental Petroleum (OXY) is a relatively new addition to Berkshire’s portfolio. Buffett took a significant stake in the business when he acquired $10 billion worth of preferred shares in 2019 to help Occidental acquire Anadarko.
He has since gone on to establish a huge stake in the common stock while Occidental has retired some of Berkshire’s preferred shares. It currently holds about 27% of Occidental’s shares outstanding.
The energy company has much more exposure to the price of oil than other integrated operators do. Its position in the Permian Basin in the Southwest gives it a relatively cheap source of U.S. oil production.
It recently added to that position with the acquisition of CrownRock, which closed at the start of August. Chief Executive Officer Vicki Hollub estimates the acquisition will increase free cash flow by $1 billion as long as West Texas Intermediate crude oil trades around $70 per barrel.
Unfortunately, the price of oil has dropped considerably during the past six months, putting Occidental in a precarious position considering the amount of debt it took on to make the CrownRock acquisition. Its leveraged exposure to oil production has pushed down Occidental’s share price to levels it hasn’t seen since the beginning of 2022.
Interestingly, Buffett hasn’t taken the opportunity to buy shares of the stock at these low prices after consistently buying them for more than two years straight. In his 2023 letter to shareholders, he wrote: “No one knows what oil prices will do over the next month, year, or decade. But Vicki [Hollub] does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders.” Which makes Buffett’s lack of purchases over the past four months or so all the more curious.
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 that he has no interest in taking a controlling stake of the company.
Occidental’s current share price of about $50 gives it an enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of just 5.3. Even with the pressure on oil prices, that’s an attractive price for the stock. And if you think oil prices will rebound, Occidental should see substantial benefits to its free cash flow and share price as a result.
— Adam Levy
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Source: The Motley Fool