These two Buffett stocks are too good to pass up for patient, long-term investors.
Want to help your portfolio? Watch what Warren Buffett is buying. His stock picks have, on average, crushed the market over the long term. And right now, two of his top holdings look too good to pass up.
This is a company you can buy and hold forever
Great companies can figure out how to generate impressive returns for shareholders without resorting to taking on excess debt. For decades, American Express (AXP -0.30%) has done a terrific job at doing this. Even while keeping its debt ratios low, it has consistently been able to generate double-digit returns on equity (ROE). More recently, ROE has exceeded 35% — a figure only the most profitable companies can achieve with such low debt levels.
Impressive profitability metrics have resulted in market-beating performances for the stock. Over the last 12 months, its shares’ return has beaten that of the S&P 500 index by more than 50%. But it’s not just short-term outperformance. Over the past decade, for comparison, American Express shares have beaten the market by around 11% — a slimmer, but still impressive margin.
It should be no wonder, then, that American Express is one of Buffett’s longest-tenured holdings. He’s owned shares in the company for more than two decades. Following several additional purchases, not to mention the extreme growth in value for his initial stake, American Express is now the second-largest position in Berkshire Hathaway‘s publicly traded portfolio.
Looking ahead, American Express still retains one of the most iconic brands in the U.S. regardless of industry. And its commanding credit card market share for high-net-worth consumers isn’t going away anytime soon. Shares aren’t obviously cheap at 21 times earnings — just above its trailing-three-year average — but that’s a fair price to pay for a bona fide blue chip stock with the backing of Buffett, arguably the best investor of our time
AXP Return on Equity data by YCharts
Want more downside protection? Buy this Buffett stock
On an earnings basis, it’s not obvious that Mastercard (MA -0.12%) — another Buffett stock — is more attractive than American Express. Mastercard shares currently trade at 38 times earnings, a healthy premium to American Express’ 21 times earnings multiple.
Could the difference be associated with higher earnings growth rates? Not really. Over the last five years, American Express has generated average annual earnings growth of around 15%. And over the next five years, analysts expect that to grow to around 25% per year. Mastercard, meanwhile, has averaged EPS growth rates of around 17% in recent years, with roughly that figure expected over the coming five years.
If earnings can’t explain Mastercard’s premium valuation, what can? Likely, it is due to differences in their business models. Whereas Mastercard’s business is largely dependent on transaction fees, American Express has a much more capital-intensive business model. Just take a look at their employee bases. Despite Mastercard having a market valuation more than twice as large as American Express, it employs around half as many people.
Not only does American Express offer more services to its customer base, but it also exposes itself to significantly more credit risk considering it underwrites its customers’ debt. Mastercard, for comparison, typically only offers access to its payment network, with other financial institutions assuming the credit risk.
During a recession, American Express would — at least on paper — have much more downside potential than Mastercard. And despite strong jobs data this month, some recession indicators are starting to signal potential trouble ahead.
Are you paying a premium for Mastercard’s business versus American Express’? Absolutely. But is it the stock you’d want to own if markets turn sour? Again, absolutely.
But why pick one over the other? Buffett owns both, and the answer here may simply be to diversify your investment by splitting $1,000 evenly between the two. That way, you own two high-quality businesses backed by Buffett. And if your holding time horizon is long enough, any upfront valuation premiums can be spread out across many years, or even decades.
American Express is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Mastercard. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.