3 Warren Buffett Stocks to Buy Hand Over Fist in August

Warren Buffett’s understanding of how the stock market works is still second to none. That’s the chief reason why — after a short hiatus during and because of the COVID-19 pandemic — Berkshire Hathaway is once again outperforming the overall market. You’d be wise to poach a few of Buffett’s picks when you can.

To this end, here’s a closer look at three of the top Buffett picks to start with sooner rather than later.

Bank of America

Anyone keeping tabs on Buffett or Bank of America (BAC -4.86%) of late probably already knows that Berkshire’s been selling off sizable chunks of its BofA holding. As of the latest look, he’s sold roughly $3 billion worth of the bank’s stock just since mid-July, leaving behind nearly 962 million shares worth around $40 billion. Both figures could be smaller by the time you’re reading this though; we’ll know for sure on Saturday, Aug. 3, when Berkshire Hathaway is scheduled to report its second-quarter results.

On the surface it’s a red flag. These sales superficially suggest Buffett and his team of managers are souring on Bank of America’s prospects. Maybe they’re concerned about the bank’s growing losses on loans, or its shrinking net interest income, fearing these metrics are an omen of what’s to come.

The reasoning behind the sale, however, may not be nearly as dire as some are speculating. In all likelihood, Berkshire is simply taking some profits on what’s become an overvalued stock.

Thanks to BofA’s 65% run-up from its October low, shares are now priced about 20% above their book value. That’s neither outrageous or unsustainable, to be clear, but given that tax rates on capital gains could soon be bouncing higher following their temporary reduction, now’s arguably a better time than later for Berkshire to tweak its portfolio.

Here’s the thing: Buffett’s tax concerns may or may not be your tax concerns. You’re also not as likely to be as overloaded with bank stocks as Berkshire currently is. Indeed, newcomers would be buying a solid bank stock that’s boasting an impressive forward-looking dividend yield of 2.4%.

Chevron

Some investors are surprised to learn that Chevron (CVX -2.67%) isn’t just in Berkshire’s portfolio, but that it’s the fund’s fifth-biggest position — a stake worth nearly $20 billion. Sure, the world’s still burning plenty of oil and gas. This is just transitional though, now that alternatives like solar power and electric cars are entering the mainstream. And crude oil’s price hasn’t really budged since late 2022 despite rekindled economic strength since then, underscoring arguments that the energy industry’s future is — at best – questionable.

But rumors of the oil and gas business’s impending end may be greatly exaggerated. The United States Energy Information Administration believes natural gas will still be the nation’s single-biggest source of electricity production beyond 2040, while Standard & Poor’s predicts (thanks to the continued use of combustion-powered automobiles) that liquid fuels will still be the planet’s most-used source of fuel for energy creation as far down the road as 2050. We’re also going to need about as much petroleum and related liquids then as we do now.

Connect the dots: There are still at least a few decades’ worth of good money to be made in the oil drilling, extraction, and refining business.

Don’t misunderstand. Chevron is not and will never be a growth stock. It’s all about the cash flow stemming from the extraction of crude oil and its conversion into gasoline. This reliable cash flow in turn supports Chevron stock’s continued dividend payments. A little over half of the company’s profits are passed along to shareholders in the form of dividends, in fact. With newcomers stepping in while the dividend yield stands at a little more than 4%, however, it’s a fair trade-off. Buffett seems to think so anyway.

American Express

Last but not least, add American Express (AXP -6.59%) to your list of Warren Buffett stocks to buy hand over fist in August. You likely lump it together with rival credit card companies Visa and Mastercard, (both of which are also Berkshire holdings by the way). And to be fair, there are clear similarities. But there are important differences, too.

Chief among these differences is the fact that the perks and rewards offered to American Express cardholders are far more extensive than those available to Mastercard and Visa cardholders. For instance, American Express’ Platinum cards outright offer annual credit toward hotel stays, credits with select retailers, and ride-hailing credits. That’s in addition to cash back on a percentage of grocery purchases and points for booking flights with certain airlines.

These perks aren’t always free, mind you. Although the company does offer no-fee cards, to receive the very best of its rewards programs, cardholders must pay anywhere from a few hundred to several hundred dollars per year. The thing is, these perks are worth it, often more than paying for themselves.

More to the point for interested investors, American Express isn’t so much a credit card company as it is a rewards-program management outfit that just happens to use credit cards and charge cards as the basis for running its business.

More important than that, the model works! With the exception of pandemic-crimped 2020, this company’s top line has grown every year since 2017. Operating income and per-share profit growth has been almost as impressively consistent. This is arguably the big reason Buffett hasn’t just stuck with the stock, but has allowed it to become Berkshire’s third-biggest holding now worth over $38 billion.

AXP Revenue (Quarterly) data by YCharts

The kicker: Although American Express stock has dramatically outperformed Visa and Mastercard shares since the market’s early 2020 low, at a trailing price-to-earnings ratio of less than 19, this ticker is still cheaper than either of those competing names.

It’s worth adding that this recent outperformance likely reflects American Express’ more affluent customer base, which isn’t suffering quite the same economic hardship other credit card companies’ customers are at this time. As long as the current situation remains the status quo, this stock could continue to outperform other players in the same business.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Chevron, Mastercard, and Visa. 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.