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2 Warren Buffett Stocks to Buy Hand Over Fist and 1 to Avoid

Motley Fool - Wed Nov 22, 2023

As one of the most successful investors ever, Warren Buffett is closely watched by retail investors who are looking to find worthwhile buying opportunities. Berkshire Hathaway's equities portfolio is public for anyone to see, so investors can find potential ideas.

But while there are many stocks that Buffett owns that might be worth taking a closer look at, there are also some to stay away from. With that said, here are two businesses investors should consider owning without hesitation and one to avoid like the plague.

2 Buffett stocks to buy: Visa and Mastercard

Visa(NYSE: V) and Mastercard(NYSE: MA), the two dominant global card networks, are two stocks Berkshire owns that investors should look to buy. While they only represent a combined 1% of the conglomerate's massive $359 billion portfolio (as of Nov. 20), these are two of the best companies in the world.

Their financials prove this. In the past decade, Visa has increased its revenue and diluted earnings per share (EPS) at annualized rates of 10.7% and 15.9%, respectively. It's a similar story for Mastercard. Sales and diluted EPS have risen at compound annual growth rates of 11.6% and 16.3%, respectively, in the last 10 years. This strong fundamental performance is why both stocks have crushed the broader market historically.

It's easy to become optimistic about their futures, too. Visa and Mastercard have benefited from the powerful secular trend of the rise of cashless transactions. As credit cards continue to be a popular method of payment, and at the same time, developing economies shift from primarily cash usage, these two businesses should keep growing thanks to these tailwinds. Wall Street average analyst estimates call for double-digit revenue and earnings growth for both Visa and Mastercard over the next five years.

Investors can also view these two companies as having tremendous downside protection. That's due to their strong network effects, which protect them from the threat of competition and potential new entrants trying to disrupt the industry. By having billions of their cards in circulation around the globe, coupled with the hundreds of millions of merchants that accept them as payment, Visa and Mastercard are so entrenched in our society and economic system that it's almost impossible to see them losing their competitive standing.

As of this writing, Visa trades at a forward price-to-earnings (P/E) ratio of 25, with Mastercard selling at a forward P/E multiple of 28. On the surface, these valuations look expensive. But based on the positive attributes I touched on, it might be smart to pay up for these stellar businesses.

1 Buffett stock to avoid: Bank of America

Bank of America(NYSE: BAC), which is Berkshire's second-largest holding worth $31 billion, is a Buffett stock that I think investors should avoid. Its share price has fallen 20% in the past 12 months, compared to 14% gains for both the S&P 500 and rival JPMorgan Chase.

To be fair, perhaps there's no investor out there who understands bank stocks better than the Oracle of Omaha. However, what gives me pause right off the bat is just how intensely competitive the banking industry is. As a diversified financial services enterprise, Bank of America goes up against a vast number of businesses when it comes to consumer banking, wealth management, commercial banking, and capital markets operations. This problem is exacerbated when you realize that financial services are essentially just commoditized products. This makes it hard to differentiate Bank of America's offerings in the marketplace.

At a trailing P/E ratio of 8.4, investors might view the stock as too cheap to ignore. But in addition to the competition, also consider the company's cyclical nature, as well as the overwhelming complexity of any banking institution's operations, and it's probably a good idea to pass on the stock.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, JPMorgan Chase, Mastercard, and Visa. The Motley Fool 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.

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