These seven stocks fit the Warren Buffett playbook.
So-called Warren Buffett stocks have the hallmarks of terrific buy-and-hold investments — except the world-famous investor doesn’t have them in his portfolio. The stock market had an absolutely blockbuster year in 2021, with the S&P 500 index set to finish the year up more than 25%. Yet, with interest rate hikes expected in 2022, early projections from Wall Street banks peg 2022 gains in the high single digits. In the face of tighter market conditions and lower expectations, taking a page out of Warren Buffett’s investing playbook may not be a bad idea. As CEO of Berkshire Hathaway Inc. (ticker: BRK.B, BRK.A), the “Oracle of Omaha” focuses on simple business models, resilient industries and strong economic moats to find value stocks that generate fantastic long-term returns — and the following seven stocks look like perfect additions to Buffett’s stock portfolio.
Capital One Financial Corp. (COF)
Capital One Financial is the fifth-largest consumer bank in the country and the eighth-largest overall, operating through three segments: credit cards, consumer banking and commercial banking. Although the stock has fallen about 18% from mid-August highs, it’s still up nearly 50% through late December, trading at about $146 per share. Third-quarter results, released in late October, showed that revenues rose 6% year over year to $7.8 billion and net income hit $3.1 billion, or $6.78 per share. Net interest income advanced 5% year over year, and with the Federal Reserve expected to raise rates next year, financial services firms stand to benefit. Buffett has long favored credit card stocks, and his portfolio currently includes a 19.1% stake in American Express Co. (AXP), as well as smaller stakes in Visa Inc. (V) and Mastercard Inc. (MA). With COF going for less than 6 times earnings, the stock offers a compelling discount that Buffett would love.
Albertsons Cos. Inc. (ACI)
Albertsons is one of the nation’s largest food and drug retailers, operating 2,278 stores across 34 states under names like Tom Thumb and Safeway. In 2020, sales shot up 11.6% as consumers stocked their pantries and opted for meals at home. While sales fell 1.9% in the first half of 2021, this dip was much smaller than expected, revealing the stickiness of food-at-home trends and their continued ability to propel top-line growth. In early 2021, Buffett increased his investment in competitor Kroger Co. (KR) by 21% and holds an 8.3% stake in the company. That said, Albertsons stock has outpaced Kroger this year, up 70% to Kroger’s 40%. In mid-December, Albertson’s announced new digital offerings: Meal Plans, which uses the app Mealtime to generate shopping lists, and Schedule and Save, which auto-replenishes essential items. These features capitalize on emerging trends in grocery store technologies and will help Albertsons stay ahead of the digital curve.
Procter & Gamble Co. (PG)
With a market capitalization of nearly $400 billion, Procter & Gamble is the largest consumer staples company in the world, owning iconic brands such as Pampers, Tide, Gillette, Old Spice, Swiffer and Oral-B, among many others. Buffett held almost $4 billion in PG stock until 2016, before selling it off to fund Berkshire’s full acquisition of Duracell, a former PG brand. Buffett likes consumer staples companies because they are consistent and recession-proof, employ strong brand names to create loyal customers, maintain pricing power and deliver long-term value generation. In the first quarter of fiscal 2022, PG grew organic sales in 9 out of 10 product categories, and the company has now increased its dividend for 65 straight years. “PG’s consistency will be appreciated as we progress through earnings season and peers aren’t as successful at mitigating the impact of inflation and supply chain constraints,” note analysts from RBC.
General Mills Inc. (GIS)
Another consumer staples company is General Mills, which produces iconic grocery and convenience store brands, such as Pillsbury, Cheerios, Häagen-Dazs, Nature Valley and Yoplait. In fact, General Mills serves more than 95% of American households, underscoring its steep market penetration and brand desirability. While second-quarter earnings missed expectations, 2022 net sales guidance was revised upward, from a decline of 1% to 2% to growth of 4% to 5%. What’s more, recent acquisitions of pet food brands from Tyson Foods Inc. (TSN) produced 14% organic sales growth this past quarter and developed a new revenue channel. “General Mills has earned a moat in the natural pet food segment, where its BLUE brand has number-one market share, pricing power, and returns in excess of our estimate of the firm’s cost of capital,” says Morningstar equity research analyst Rebecca Scheuneman. This conservatively run, consistent business has earned its place as one of the best “Warren Buffett stocks” to buy.
Oracle Corp. (ORCL)
Buffett bought $2.1 billion of Oracle stock in 2019 but ditched it just a quarter later, citing an inability to understand the business model. Founded by Larry Ellison in 1977, Oracle provides information technology services for corporate clients. Oracle has performed well this year, up about 37%, and currently trades near $88 per share, well below analysts’ mean target price of $103 per share. In late December, Oracle announced a blockbuster deal to acquire electronic medical records company Cerner Corp. (CERN) for $28.3 billion, tapping into the $3.8 trillion healthcare industry by bringing troves of health data into its cloud. “Cerner will be a huge additional revenue growth engine for years to come as we expand its business into many more countries throughout the world,” said Ellison, who serves as chairman and chief technology offer. That said, ORCL stock has fallen 8% since the announcement, and Moody’s has placed Oracle’s credit rating under review.
AutoZone Inc. (AZO)
In contrast to Oracle’s complex slew of technology products, AutoZone Inc. offers an incredibly simple business model: retailing automotive products at more than 6,700 locations worldwide. In addition, its commercial segment, which provides parts for repair centers and dealers, posted 29.4% revenue growth in the 2022 fiscal first quarter and has helped diversify its revenue stream. High used-car prices have induced consumers to keep their cars longer, providing a significant tailwind to AutoZone in the way of new parts, upgraded accessories and routine service. Although the stock is pricey — about $2,000 per share — it reflects a price-earnings ratio of just 20 times, well below the S&P 500 average, and is up more than 70% year to date, outperforming competitors O’Reilly Automotive Inc. (ORLY) and Advanced Auto Parts Inc. (AAP) on both metrics. “As AutoZone’s commercial revenue rises, it should reap the benefits of a strong dual-market approach, balancing the faster growing professional segment with more lucrative DIY sales,” says Morningstar equity analyst Zain Akbari.
FactSet Research Systems Inc. (FDS)
A giant in the financial world, FactSet provides financial data and market intelligence on securities, companies and industries for clients such as asset managers, investment banks, private equity firms and venture capital outfits. More than 6,400 firms subscribe, and the service has an impressive retention rate of 95%. In the first quarter of fiscal 2022, revenue grew 9.4% year over year, and net income grew 6.4%, to $108 million. FactSet has aggressively pursued acquisitions to build market share, announcing three in the past year. Its most recent, a $1.9 billion deal to acquire CUSIP Global Services from S&P Global Inc. (SPGI), is expected to increase FactSet’s annual content and technology subscription value to more than $425 million. “Strong demand environment along with improved competitive positioning driven by investments in content and technology bode well to deliver high-single-digit revenue growth in the mid-term,” note analysts from RBC. The firm holds a price target of $525 on FDS stock, well above its trading price of about $490.
Seven best “Warren Buffett stocks” to buy:
— Capital One Financial Corp. (ticker: COF)
— Albertsons Cos. Inc. (ACI)
— Procter & Gamble Co. (PG)
— General Mills Inc. (GIS)
— Oracle Corp. (ORCL)
— AutoZone Inc. (AZO)
— FactSet Research Systems Inc. (FDS)
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7 ‘Warren Buffett Stocks’ to Buy originally appeared on usnews.com
