Berkshire Hathaway is betting big on these two companies, but one stock is superior.
Berkshire Hathaway, Warren Buffett’s holding company, has moved billions of dollars in recent quarters. In a rare move, it even secretly bought a huge stake in one company that it only revealed recently.
Want to bet on Buffett? That’s a wise choice. His moves are always worth watching. But not all of his stock picks are right for everyone. One of Buffett’s stocks below could be a great fit for your portfolio today. The other one you should probably leave alone for now.
A secret $6.7 billion investment
Whenever an investor or business purchases more than 5% of a company’s outstanding shares, it’s generally required to publicly disclose the stake with the Securities and Exchange Commission (SEC). But last year, Berkshire requested and received an exemption from the SEC, allowing it to buy billions of dollars in shares of a particular company without making its moves public.
Earlier this year, Berkshire finally disclosed the investment: A $6.7 billion position in Chubb (CB 1.50%), a major insurance operator. Right now, Berkshire controls around 6.1% of the entire company.
Berkshire isn’t new to insurance. Many of its core subsidiaries are insurance operators, including well-known brands like GEICO. Buffett has purchased many insurance companies over the years, spending billions of dollars on acquisitions. By building a stake in Chubb, Buffett is swimming in a pool he knows very well.
On the surface, there’s not much to get excited about with this investment. Over the last decade, Chubb stock has lagged behind the performance of both Berkshire Hathaway and the S&P 500. Chubb shares also trade at a higher price-to-book valuation than Berkshire, with lower annual book-value growth.
So why is Berkshire buying up Chubb stock? For starters, Berkshire has a huge cash hoard totaling around $189 billion. That money is earning very little for shareholders, and putting it into a relatively stable business is likely a better use of funds than letting it sit in cash.
Additionally, underwriting profitability is expected to solidify over the next year or two, with Swiss Re Group projecting returns on equity for major insurers to average at least 10% in 2024 and 2025 — up from just 6% in 2023.
Buying Chubb stock may be a wise bet for Berkshire’s portfolio. But your personal portfolio may be better off with stocks that have higher upsides, such as the next company on this list.
BRK.B Total Return Level data by YCharts.
This might be the perfect Buffett company
Buffett likes to buy businesses that he can comfortably own for decades. In this regard, few companies are more attractive than Visa (V 1.60%). According to the latest filings, Berkshire has a $2.3 billion position in the company, a stake that was first established in 2011, a few years after Visa went public.
It’s not difficult to see what Buffett loves about Visa. Even as a $500 billion business, Visa is still growing revenue by around 10% annually. Its return on equity is an astounding 46.8%, up from just 35% five years ago.
The company’s profitability is also off the charts. Profit margins last quarter were around 54%. Over the last five years, they’ve averaged roughly 51%.
All of this is powered by Visa’s dominant control of the U.S. credit and debit card markets. Data compiled by Statista shows Visa with a 61% market share. Just three other companies control the remaining 39%.
Payment networks are high-margin businesses and require relatively little capital investment. These markets also benefit from scale, which creates natural industry consolidation. If you’re one of the few major players like Visa, the end result is a highly scalable, highly profitable business.
Since Buffett purchased Visa stock, the shares have increased in value by roughly 1,250%. Returns have slowed more recently. Over the past three years, for instance, shares have only gained 11% in value, but much of that has come from a shrinking valuation. Today, Visa stock is valued at just 30 times earnings, a sizable reduction from its 50 times earnings price tag in 2021.
With the S&P 500’s valuation also around 30 times earnings, Visa is a superior choice for most investors. Its margins and returns on equity are difficult to match, and the competitive advantages that created this financial might are durable for years, if not decades, to come. This might be the most attractive stock in Buffett’s portfolio right now.