There are some hot deals on some of Buffett’s favorite stocks.
Many consider Warren Buffett the world’s greatest long-term investor, so it’s a ringing endorsement for any stock he holds in his portfolio. Investors can follow Buffett’s picks via his holding company, Berkshire Hathaway. The company’s massive portfolio is worth hundreds of billions of dollars and holds dozens of stocks.
Investors should always do their homework and make their own buying and selling choices, but Berkshire’s portfolio is a great starting point for finding some ideas. Here are two Buffett stocks worth buying today, and one that investors should avoid.
Buy: Nu Holdings
This Warren Buffett stock is one many Americans won’t recognize. Nu Holdings (NU -1.69%) is a Latin American digital-banking company that services consumers in Brazil, Mexico, and Columbia.
Over 95 million people bank, save, invest, spend, and borrow via Nu, which uses the Internet to reach customers instead of physical branches. It enables banking for people in these countries who might not live in an area that’s developed enough to offer dependable banking services.
Nu Holdings has a tremendous long-term opportunity to expand. The region has over 650 million inhabitants, giving the company plenty of room to grow and enter new countries over time.
The company has over 50% market share of Brazillian adults, its core market. That supports the idea that Nu is a quality banking platform and can hopefully replicate that success in its newer markets.
The business is growing quickly. Gross profit rose 87% year over year in Q4, and bottom-line earnings are taking off as revenue outpaces Nu’s expenses.
Analysts believe Nu Holdings could grow earnings by an average of 52% annually over the next three to five years. The company has a forward price to earnings (P/E) ratio of just 27 and a PEG ratio of 0.5.
Nu stock is a flat-out bargain for any long-term investor willing to hold for the long term. The stock is a minimal holding for Buffett at less than 1% of Berkshire’s portfolio, but that could change if the stock appreciates over the coming years.
Buy: American Express
On the other end of the spectrum, credit card company American Express (AXP 6.22%) is one of Buffett’s most significant holdings. Its 9.1% portfolio weighting makes the company Berkshire’s third-largest investment currently.
Credit cards are a wildly popular spending tool for U.S. consumers, and American Express is right in the thick of things. It’s both a payment processor and a lender, so it runs its own payment network and lends consumers money when using their American Express cards. The company has built its brand with an image of high rewards and status that attracts higher-quality borrowers.
Business is booming. Credit card debt across American households is at an all-time high.
Additionally, wealth is steadily transferring from older generations to younger workers entering their prime earning years. Management has noted on earnings calls that Millennials and Generation Z are the largest demographics among new customers. All in all, American Express is a blue chip finance stock that Buffett has trusted with his money since he first bought shares in the early 1990s.
The stock is trading at a solid value for long-term investors today. Shares trade at 17 times estimated 2024 earnings, while analysts believe earnings will compound at over 13% for the next several years. That’s a reasonable PEG ratio of 1.3, which leaves room for long-term investment returns.
Avoid: Moody’s
Investors familiar with Moody’s Corporation (MCO 0.02%) may be surprised to see the stock in this article’s “avoid” portion, even though it’s undoubtedly a high-quality business. Moody’s is one of the primary credit analysis companies that score corporate credit across Wall Street.
Corporations depend on credit ratings to give investors confidence in a business, and lenders look at Moody’s ratings when underwriting corporate loans. The company also sells various research and analytics based on its treasure chest of data.
Moody’s has obliterated the broader market over its lifetime. Including dividends, the stock is up over 7,500% to the S&P 500‘s 1,700% gain, so it’s not even a contest. It’s understandable to see why Buffett owns shares. The stock is in Berkshire’s top 10, at 2.5% of the portfolio. So why should investors avoid its stock right now?
Simply put, it comes down to valuation. Great companies sometimes earn a hefty premium on Wall Street.
Moody’s is trading at a forward P/E of over 34 times earnings, while analysts believe earnings will grow by just under 12% annually over the next three to five years. That’s a PEG ratio of nearly 3, much higher than the others on this list, which signals that shares are expensive for the company’s expected growth.
Moody’s is an excellent company at a poor price. Put the stock on your long-term shopping list and wait for a lower price to scoop up shares.
American Express is an advertising partner of The Ascent, a Motley Fool company. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Moody’s. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
