In the world of investing, Berkshire Hathaway CEO Warren Buffett has earned legendary status for his investment performance over half a century. Berkshire’s 2022 annual report says that since taking over Berkshire in 1965, Buffett has returned investors 3,787,464% as of the end of 2022. In other words, if you invested $100 in Berkshire when he took over, you’d have over $3.78 million today.
Buffett knows a thing or two about investing in quality companies with good management teams that can succeed in the long run. With that said, Buffett and his team at Berkshire are human and occasionally get stock picks wrong. Two Buffett stocks, American Express (AXP) and Moody’s Corporation (MCO), stand out as excellent holdings no matter what the economy does, while Ally Financial (ALLY) should be avoided for the time being.
Buy American Express
American Express provides customers with credit card services and loans. Brand recognition is one trait that Buffet loves about the companies he invests in. Buffett invested billions in highly recognizable companies like Apple and Coca-Cola and said, “You can’t create another American Express.”
What makes it stand out is its high-end credit card products, which attract a premium customer base. Its high-end customer base means that American Express has solid credit quality. In the first quarter, the company’s net write-off rate was 1.6%, while its loans 30 days past due were 1.2%, which remains below pre-pandemic levels.
IMAGE SOURCE: AMERICAN EXPRESS.
American Express’s premium customer base can help it weather difficult economic times even if we experience a recession this year. According to CEO Stephen Squeri, “[T]he economy is definitely bifurcated, and I think at the lower end of the economy, you are seeing some stress, but we just don’t have that.” It expects to see strong demand for travel this spring into the summer, which should continue to boost spending among its customer base.
Buy Moody’s Corporation
When governments or companies want to raise money through debt, investors must weigh the risks and rewards and understand how likely the debt will be repaid. Moody’s provides credit ratings to debt issuers and is a crucial player in the fixed-income space.
Moody’s competitive advantage is the limited competition in the credit-rating industry, which is incredibly hard to break into. According to the Securities and Exchange Commission’s report on nationally recognized statistical-rating organizations, Moody’s holds a 32% share of the credit-rating market. Only S&P Global has a higher share of the market at 50%.
Last year, Moody’s investor-services segment, which accounts for its rating business, saw revenue decline 29%. The company saw slow credit-market activity across all sectors as market volatility, rising interest rates, and concerns about inflation and a recession kept debt issuance muted.
Moody’s has been building out its analytics and data products over the last five years to diversify its earnings and ride out a slowdown in credit activity like what happened last year. It has invested heavily in providing companies with risk-management solutions, insurance data, and analytics to help companies mitigate weather and disaster-related risks.
Its Moody’s analytics segment saw revenue grow 15% amid uncertainty across markets, with robust demand for know-your-customer (KYC) and compliance solutions, which help companies prevent money laundering, fraud, identity theft, and other solutions. According to the Federal Trade Commission, fraud and identity-theft cases have increased in recent years, with 5.7 million cases last year, up from 4.7 million the year before.
Q1 earnings displayed similar resiliency. Despite Moody’s investor-services revenue declining 11%, its analytics segment was up 6%, and total revenue dropped by 3%.
Moody’s is well positioned as a trusted provider of credit ratings in a challenging industry to break into. That, plus its analytics business, provides stability during slowdowns in credit issuance, making it another solid Buffett stock you can buy today.
Avoid Ally Financial
Ally Financial has a range of businesses, including Ally Invest, Ally Credit Card, and Ally Lending. However, its primary business is making automotive loans to consumers. Automotive loans make up 57% of Ally’s loan and lease portfolio, and the prospect of a potential recession has investors concerned about its credit quality.
In Q1, the bank saw revenue remain pretty flat compared to last year, while diluted earnings per share (EPS) fell 48%. It also had net charge-offs of $409 million compared with $133 million in the same quarter last year. Its net charge-off rate on auto loans of 1.68% was in line with management’s expectations, while its 30-day delinquency rate was up to 3.24%.
Ally Financial trades at an appealing price — 25% below tangible book value and 5 times forward earnings — and could be an appealing stock for long-term investors. However, the bank will continue to face headwinds in the short term.
Higher automotive prices and higher interest rates have weighed on borrowers. According to data from Edmunds.com and reported by Bloomberg, 16% of Americans are paying at least $1,000 per month in auto loans. Not only that, but Cox Automotive reports that auto loan delinquency rates have climbed to their highest level in 15 years.
While Ally trades at an appealing valuation, tightening economic conditions and the prospect of a recession in the second half of 2023 could lead to a further uptick in charge-offs, which is why I’m avoiding this bank stock for now.
— Courtney Carlsen
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Source: The Motley Fool