For nearly six decades, Berkshire Hathaway (BRK.A -0.06%) (BRK.B -0.95%) CEO Warren Buffett has printed profits for his shareholders. Since early 1965, Buffett led his company’s Class A shares (BRK.A) to a robust average annual return of 20.1%, equivalent to an overall gain of 3,641,613%, until December 31, 2021. For those in your home score, that’s a total return 120 times that of the benchmark S&P500 over the same 57-year period.
In other words, riding the Oracle of Omaha ponytails has been a long-proven formula for building wealth. That’s why it makes perfect sense to look to Berkshire Hathaway’s investment portfolio during the current bear market decline.
What follows are three Warren Buffett stocks that investors can buy with confidence in October.
Warren Buffett’s first stock that’s a screaming buy in October is the payment processor MasterCard (MY -0.85%). Since hitting an all-time high earlier this year, the company’s shares have fallen 28%. For a stock that has been in a virtually unstoppable uptrend for over a decade, this is a big move down.
Arguably the biggest headwind for Mastercard is that it is a cyclical business. Cyclical companies fluctuate with the US and/or global economy. With most central banks battling inflation by raising interest rates and U.S. gross domestic product (GDP) shrinking in the first two quarters of 2022, the prospect of a recession is growing in the US. United States and abroad. This would portend reduced consumer and business spending, which would negatively impact Mastercard’s revenue and earnings.
But there are two sides to this coin. Although recessions and economic contractions are an inevitable part of the business cycle, periods of expansion last much longer. Long-term investors are therefore able to take advantage of the natural growth of the US and global economy through a payment processing giant like Mastercard.
To capitalize on this, Mastercard has the enviable position of being number 2 in the United States, the world’s largest consumer market. In 2020, Mastercard controlled 23% of the credit card network’s purchase volume. Since it is a fee-driven business, higher inflation may actually help Mastercard’s revenue, as it tends to increase consumer and business spending on a nominal dollar basis.
There are also a lot of opportunities abroad. Most transactions in the world are still done in cash. Since Mastercard has more than $5.9 billion in cash and cash equivalents and has generated nearly $10 billion in operating cash flow over the past 12 months, the company has more than enough in its coffers to move organically or acquisitively into underbanked emerging markets.
Finally, Mastercard’s success is a function of its loan avoidance. While it would likely have no problem collecting interest income as a lender, it would expose it to defaults and losses that occur during recessions. Not having to set aside capital for loan losses allows Mastercard to maintain profit margins above 40% and rebound faster than most financial stocks after a recession.
Warren Buffett’s second stock just begging to be bought in October is Regional Bank American bank (USB -1.01%)which is the parent company of the more familiar American bank.
Similar to Mastercard, the skepticism surrounding US Bancorp is tied to the weakening US economy. Two consecutive quarters of declining GDP and a rapid rise in interest rates certainly seem to be a recipe for higher loan defaults. It is not uncommon for banks to set aside capital to cover loan losses during an economic downturn, which negatively impacts earnings per share.
However, these are only short-term headwinds. US Bancorp is able to benefit from disproportionately long periods of economic expansion and a number of operational advantages to grow over time.
For example, US Bancorp’s management team wisely avoided riskier derivative investments that got many central banks into trouble. By choosing to focus on the bread and butter of banking – loan and deposit growth – US Bancorp has provided one of the highest returns on assets among major banks and has rebounded from economic downturns faster. than many of his peers.
Bank stocks are also the main beneficiaries of the US central bank’s hawkish monetary policy. As interest rates rise, banks with floating rate loans outstanding should generate higher net interest income without doing additional work.
But the biggest operational benefit is undoubtedly US Bancorp’s digital engagement trends. At the end of May, 82% of active customers were doing their banking online or via a mobile application. Additionally, 64% of total sales were made digitally, representing an increase of 19 percentage points from the start of 2020. Digital transactions cost a fraction of the cost of face-to-face and phone interactions, enabling the consolidation of physical transactions in the United States. bank branches and enhanced the operational efficiency of the company.
Investors have the opportunity to buy shares of US Bancorp for just 8 times Wall Street’s projected earnings for the coming year, and can receive a solid return of 4.6% for their patience.
The third and final Warren Buffett stock to buy the first time in October is none other than FAANG stock Amazon (AMZN -1.57%).
To stay within the dominant theme of this list, historically high inflation and a weakening US economy are worrying investors. Since Amazon generates the bulk of its sales from its online marketplace, it is believed that high inflation and weaker growth prospects will dampen consumer spending. While this skepticism holds water in the very short term, it has no impact on Amazon’s growth prospects in the years to come.
To say that Amazon’s online marketplace is dominant would be an understatement. According to a March 2022 report from eMarketer, it is expected to bring in just under $0.40 for every dollar in US online retail sales this year. For comparison, the #2 through #15 in U.S. online retail market share is expected to generate $0.31 for every dollar this year on a combined base. This suggests Amazon’s marketplace won’t be dethroned as a direct-to-consumer retail platform anytime soon.
However, it’s important to recognize that Amazon’s online marketplace isn’t essential to growing its operating cash flow or earnings. Although it is the most revenue-generating segment for the company, online retail sales generate extremely thin margins. Far more important to Amazon is that its other high-margin sales channels perform well.
For example, the company was able to pivot the popularity of its online marketplace to more than 200 million Prime subscriptions worldwide, in April 2021. Amazon also has exclusive rights to Thursday Night Football, starting this year. With Prime members paying $14.99/month or $139/year, the company generates $35 billion in annual subscription revenue. The high-margin cash generated from subscriptions can be put to good use in its fast-growing logistics network or reinvested in other fast-growing initiatives.
In terms of operating cash flow and profit potential, it is perhaps more important to note than the Amazon Web Services (AWS) cloud infrastructure segment. Cloud growth is still in its infancy and AWS accounts for nearly a third of global cloud spending. Because cloud services margins are so high, AWS has historically generated more than half of Amazon’s operating revenue, despite only accounting for about a sixth of its net sales.
If you need another solid reason to buy Amazon stock, consider its valuation. Throughout the 2010s, investors willingly paid a multiple of 23 to 37 times year-end cash flow for Amazon stock. You can hold shares of Amazon right now for about 8 times the cash flow Wall Street predicts for the company by the middle of the decade.