Through his holding company, Berkshire Hathaway, Warren Buffett has generated multi-decade average annual returns of roughly 20%. It pays to pay attention to what he is buying.
There are four Buffett stocks in particular that investors should dive deeper into right now.
These 2 Buffett stocks are growth superstars
Few stocks have outperformed Visa (V) or Mastercard (MA) since they went public. Over the past decade alone, both stocks have more than quadrupled in value. The S&P 500, in comparison, rose by just 234% over the same time period.
What has made Visa and Mastercard shares so special? The same factors make both stocks a buy today. Namely, they operate high-quality businesses that benefit from network effects. That is, the larger these businesses become, the more powerful they get.
Right now, when it comes to credit cards and debit cards, Visa has a 61% market share in the U.S. Mastercard, meanwhile, has the second largest market share with around 25%. Just four companies control nearly 100% of the U.S. market, with fourth place coming in with just a 2% market share. In other words, this is a highly consolidated market. That’s thanks to network effects.
Visa and Mastercard have been around for decades. They’ve established trust and reputation among regulatory agencies, security analysts, merchants, and everyday consumers. This trust makes merchants more willing to accept payments on both networks. It also attracts more customers, which attracts yet more merchants since these parties want to accept what the customer can pay with. It’s a positive feedback loop, one that has led to natural market consolidation.
Visa and Mastercard have greatly benefited from their duopoly market positions. Profit margins for both companies are around 50% — a significant rise from 2010 levels of roughly 30%. This rise in profitability shouldn’t be surprising. After all, businesses that benefit from network effects tend to grow stronger as they scale. And since both businesses are asset-light, greater scale means greater profitability.
As with any high-quality business, both stocks are expensive. Visa currently trades at 31 times earnings, while Mastercard trades at 36 times earnings. But with the S&P 500 as a whole trading at 27 times earnings, that’s not a steep premium to pay for two of the most profitable stocks in Buffett’s portfolio.
Looking for value and growth? Buffett has you covered.
Buffett is a big fan of bank stocks. Berkshire owns several in its portfolio. Two of these bank stocks are near opposites in many ways, yet both are buys.
The first bank stock to know about in Berkshire’s portfolio is Citigroup (C). The position is worth roughly $3 billion and has been in the portfolio since the first quarter of 2022. Back then, the share price was around $60 — very close to where shares are valued today. If you want to piggyback on a Buffett stock, this is your chance.
Why is Berkshire betting $3 billion on Citigroup? The biggest factor may be valuation. Citigroup stock trades at a 40% discount to book value. That is, the market believes the company to be worth 40% less than the listed accounting value of its assets. In comparison, Bank of America — another Buffett stock — trades at a 16% premium to book value. Citigroup has posted poorer returns on capital, but if its management team manages a comeback, expect the book value discount to narrow quickly.
Nu Holdings (NU) is another promising bank stock in Berkshire’s portfolio. Nu was created to take Latin America’s banking industry by storm. It was one of the first banks to take a digital-first approach, offering its services to anyone with a smartphone. In its first decade of operations, the business went from zero customers to over 90 million. More than half of all Brazilian adults are now Nu customers.
Nu isn’t a value stock like Citigroup. Shares trade at 8.9 times book value. But with a market cap of only $57 billion, it’s not hard to see how Nu could double or triple in size this decade merely by tapping its existing markets. Entering new countries in Latin America, meanwhile, could add even more growth potential. High multiple stocks like this can be volatile, but Berkshire has maintained its $900 million stake since 2021 without selling a single share. Patient investors looking for maximum long-term growth should consider joining in.
— Ryan Vanzo
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Source: The Motley Fool