Berkshire Hathaway CEO Warren Buffett has earned his legendary status through his commitment to his disciplined investing process and long history of outperformance. A $100 investment in Berkshire when he took over in 1965 would be worth some $2.4 million today.
So Buffett knows a thing or two about investing with a long-term mindset. That said, like all investors, the Oracle of Omaha is occasionally wrong on some of his stock picks. Two stocks in Berkshire's portfolio today stand out as no-brainer buys that can deliver no matter what is thrown at them. But another one, in particular, should be avoided in 2023.
This credit card company has resilient customers
One Buffett stock to buy hand over fist is American Express(NYSE: AXP). The credit card company has a strong brand associated with luxury.
Thanks to the brand's impressive rewards programs, luxury perks, and other value-added benefits, consumers are willing to pay almost $700 for an American Express Platinum card. Its premium customer base will help it weather an economic downturn better than others. Its lowest-tier card, the Amex Blue Card, requires a credit score of 670, which is considered to be good.
Its focus on premium customers is why its credit quality remained stellar for much of last year. Its net write-offs and loans past due remain far below pre-pandemic levels.
Its resilience was on display in 2022 when its revenue jumped 25% year over year. Its growth outpaced that of competitors Visa and Mastercard, which saw their sales grow 18.5% and 17.8%, respectively, over the same period. American Express also attracted plenty of new business, adding 12.5 million new card accounts during the year -- with millennials and Gen Z growing the fastest.
American Express is an excellent company with a strong consumer base that can help it weather an economic downturn. It guided for earnings growth next year of around 16%, well above Wall Street's expectations, and plans to cut expenses and become more efficient, making this Buffett stock one to buy today.
This advisory business thrives amid uncertainty
Marsh & McLennan(NYSE: MMC) has built a reputation as a trusted corporate advisor. It helps companies manage risk; discover the right insurance policies; and develop health, benefits, and retirement programs. Its revenue is split between risk and insurance services (60%) and consulting (40%). It has 83,000 colleagues worldwide and advises 95% of Fortune 1000 companies, making it the world's largest insurance broker.
The company thrives amid uncertainty because that's when clients need good advice the most. The past three years have posed numerous challenges -- pandemic response, supply chain issues, market volatility, rising inflation and interest rates, and the ongoing transition toward green energy. Over that time, Marsh's revenue has grown at a solid 7.6% annually, while its diluted earnings per share have grown at an even more impressive annualized clip of nearly 21%. Last year, the company generated just under $3 billion in free cash flow (cash left over after paying operational costs and capital assets) and has over $1.4 billion in cash on its balance sheet.
Its strong capital position allows it to reward investors handsomely. Last year, it repurchased $1.9 billion in shares, while paying out another $1.1 billion in dividends, which translates into a 1.4% dividend yield for investors.
Marsh is well-positioned for tough economic environments and, according to CEO Dan Glaser, it has grown its earnings per share every time there was a recession since 1962 -- making this another Buffett stock to buy today.
Avoid this consumer-staples stock for now
It's easy to see why Buffett likes Kraft-Heinz(NASDAQ: KHC). It has strong brands, including products like Kraft Mac & Cheese, Lunchables, and Philadelphia cream cheese. Also, consumer-staples stocks could offer a degree of safety during a recessionary environment.
In the past year, Kraft-Heinz has outperformed the S&P 500, gaining 18%, while the index declined 6.6%. The company has seen organic sales (net sales minus impacts from currency, acquisitions, and divestitures) grow 9.5% through three quarters of 2022.
On the surface, it was a good year for the company. However, my primary concern is that this growth isn't sustainable -- much of its growth was driven by price increases, not growing volume. In fact, Kraft-Heinz's volume was down 2.8%, with growth coming exclusively from price increases of 12.3%.
Its earnings and cash flow also lagged in the third quarter. Diluted earnings per share fell 40.7% in the quarter. Meanwhile, free cash flow for three quarters of 2022 dropped 50% to $885 million.
This drop came as the company is rebuilding its inventory at higher prices, which has increased its total input costs. With analysts' expecting virtually no growth on the top and bottom lines in 2023, Kraft-Heinz is one Buffett stock to avoid for now.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.