Skip to main content

Bank of America Corp(BAC-N)
NYSE

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

3 No-Brainer Warren Buffett Stocks to Buy to End the Year Right

Motley Fool - Fri Dec 1, 2023

Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has a knack for garnering the attention of Wall Street professionals and everyday investors. Since he became the CEO of Berkshire nearly 60 years ago, the Oracle of Omaha (as he's come to be known) has overseen an aggregate gain of greater than 4,400,000% in his company's Class A shares (BRK.A).

What makes Warren Buffett such an intriguing investor to millions is his willingness to share the traits and characteristics he looks for when analyzing companies. Plus, riding the Oracle of Omaha's coattails has made plenty of people richer over the past half-century.

Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

The good news is that even with all three major stock indexes nearing their highs for 2023, bargains can still be found within Berkshire Hathaway's portfolio. What follows are three no-brainer Warren Buffett stocks to buy right now that'll have you ending the year on a high note.

Bank of America

The first surefire Buffett stock to buy in December to end the year right is Berkshire Hathaway's second-largest holding by market value, Bank of America(NYSE: BAC), commonly referred to as "BofA." Although recessionary fears have played a role in pushing shares of BofA lower throughout the year, macroeconomic factors are one of the reasons the Oracle of Omaha is so bullish on bank stocks.

Since the end of World War II in 1945, there have been 12 U.S. recessions, only three of which have lasted at least 12 months. By comparison, there have been multiple economic expansions that spanned between four and 12 years. While Buffett can't time when downturns will occur, he can angle his company's portfolio to take advantage of disproportionately long periods of expansion. That's what he's doing with Bank of America.

The proverbial feather in the cap for BofA is its sensitivity to interest rate changes. No large U.S. bank will see its net interest income impacted more by fluctuations in interest rates than Bank of America.

With the Federal Reserve aggressively tackling historically high inflation in 2022, the aggregate 525-basis-point increase in the federal funds rate has led to a profit windfall for Bank of America. As long as the Fed remains hawkish, BofA can expect billions of dollars in added net interest income per quarter.

Furthermore, we're witnessing meaningful progress on the operating efficiency front driven by technology investments. Though BofA isn't a company most people will associate with cutting-edge technology, its digitization efforts are paying off. Nearly three-quarters of all active consumers are banking online or via mobile app, and the percentage of users completing loan sales digitally has been climbing since the decade began. Digital transactions are considerably cheaper for big banks, which is what's allowed BofA to consolidate some of its branches and reduce its operating expenses.

The final reason to add Bank of America stock to your portfolio right now is its valuation. Anytime patient investors can scoop up shares of a high-quality bank for below book value, it's a gift. BofA closed the previous week (ended Nov. 24) at 9% below its book value and roughly 9 times forward-year earnings. Long-term shareholders will also receive a market-topping 3.2% yield to boot.

Sirius XM Holdings

A second no-brainer Warren Buffett stock that can help investors end the year right is satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI).

Whereas higher interest rates can be a blessing for bank stocks, it's the opposite for businesses that rely on debt financing and/or carry large debt loads on their balance sheet. Despite making steady progress on reducing its long-term debt, a higher interest rate environment, coupled with the potential for a U.S. recession in the coming quarters, clearly has some investors skeptical of Sirius XM's near-term outlook.

But even though it's cyclical, Sirius XM provides an assortment of well-defined competitive advantages that should pay off handsomely for long-term investors. To start with the obvious, it's the only authorized satellite radio operator in the country. Although it still faces competition for listeners from terrestrial and online radio, it doesn't have to worry about any competition in the satellite arena. This gives Sirius XM the ability to outpace inflation by increasing subscription prices.

What's even more important than its monopoly status is its revenue mix. Most terrestrial and online radio companies generate the bulk of their revenue from advertising. This strategy works great until economic contractions or recessions arise, which is when advertisers are known to pare back their spending.

By comparison, Sirius XM has brought in only 19% of its total revenue from advertising (mostly from Pandora) through the first nine months of the current year. Meanwhile, 77% of total sales can be traced to subscription revenue. Subscribing customers are far less likely to cancel the service than advertisers are to reduce their spending meaningfully during an economic downturn. In other words, Sirius XM is uniquely positioned to navigate recessions successfully.

Sirius XM also provides cost transparency not seen with traditional radio operators. Though royalty expenses and talent-acquisition costs will vary from quarter to quarter, transmission and equipment expenses are highly predictable. As Sirius XM gains new subscribers, these ancillary expenses won't rise.

Sirius XM is historically inexpensive, as well. Shares can be picked up right now for less than 16 times forward-year earnings. That compares to an average forward price-to-earnings (P/E) ratio of 22 over the previous five years.

A person holding a credit card above a portable point-of-sale device while dining in a cafe.

Image source: Getty Images.

Mastercard

The third no-brainer Warren Buffett stock to buy to end the year right is payment processor Mastercard(NYSE: MA).

Like Bank of America and Sirius XM, Mastercard is a cyclical business. If U.S. or global economic growth slows or shifts into reverse, consumer and enterprise spending would also be expected to slow. A company that generates its revenue from fees on transactions, such as Mastercard, would likely struggle during a downturn.

The thing about Mastercard is that it's positioned in such a way that recessions aren't nearly as painful as they are for other financial companies. For instance, like its chief rival, Visa, Mastercard has stuck solely to payment facilitation and not ventured into the lending arena. If Mastercard wanted to become a lender, which would allow it to collect net interest income and fee revenue, it would likely succeed. But doing so would also expose the company to credit delinquencies and loan losses during recessions.

Because it strictly processes payments, Mastercard has no direct liability to loan losses and, therefore, no obligation to set aside capital to cover these losses. This simple decision by management to avoid lending is why Mastercard's profit margin is consistently above 40%.

Another reason to be optimistic about Mastercard, even with its shares close to an all-time high, is its domestic and international opportunities. It's the undisputed No. 2 payment processor in the U.S., which is the largest market for consumption in the world.

There's also a multidecade, double-digit sales growth runway in underbanked emerging markets, such as the Middle East, Africa, and Southeastern Asia. As consumers move away from cash transactions, payment facilitators like Mastercard are the natural and logical beneficiaries.

I'd be remiss if I didn't also mention that cyclicality is a two-way street. While money-based metrics may be signaling trouble to the come for the U.S. economy, recessions are short-lived. Patient investors betting on the long-term growth of the U.S. economy and consumer spending are likely to be rewarded by Mastercard.

While Mastercard's forward P/E ratio of 29 probably won't tickle the fancy of ardent value investors, this is a company whose earnings per share could grow by a 20% annualized rate over the next five years. This makes Mastercard a bargain for long-term-minded investors.

10 stocks we like better than Bank of America
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Bank of America wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of November 20, 2023

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America, Mastercard, Sirius XM, and Visa. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, 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.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.