Given the market’s recent weakness, plenty of portfolios may be due for a tune-up. Indeed, it’s possible the selling since late July has been rough enough to shake people out of several positions, leaving them in need of an outright reload.
If you’re one of those investors, don’t make your response too complicated. Keep it simple by poaching a few picks from well-proven stock-picker Warren Buffett and his acolytes at Berkshire Hathaway.
These are three of the best all-around Buffett holdings to buy now — stocks that would be at home in nearly anyone’s portfolio.
Bank of America
Yes, the banking industry is running into headwinds. Although higher interest rates are generally positive for lenders (as they lead to higher profit margins on loans), the Federal Reserve’s recent spate of rate hikes is taking a toll on the economy. That has crimped demand for capital.
Never mind the fallout from the regional banking segment’s liquidity crisis earlier this year. While it’s now clear that only a handful of banks such as Silicon Valley Bank and First Republic were ever at any serious risk of insolvency, the episode did cast a shadow of doubt on most banks’ current capitalization risks.
These challenges, however, are more than priced into familiar bank stocks. Meanwhile, what’s not being priced in are these institutions’ long-term values. Falling stock prices have buoyed dividend yields as well.
Enter Bank of America (BAC -1.10%), Berkshire Hathaway’s second-biggest equity holding, at a little over one billion shares worth nearly $30 billion. It’s a position Warren Buffett has held (and been adding to) since 2017.
Why? It’s reliable, for one. Not that mega-banks aren’t capable of imploding. But, in the banking business, size certainly helps, and this one is the second-biggest U.S. bank by assets, boasting $2.5 trillion worth of assets including $373 billion in cash and another $756 billion in relatively liquid debt securities. No bank is ever truly “too big to fail.” In Bank of America’s case though, the prospect is incredibly unlikely.
Perhaps the top reason you’d want to take Warren Buffett’s lead and buy this stock, however, is the top reason that Berkshire has been willing to stick with it for so many years: the income it generates. Bank of America has not only paid a respectable dividend since it reinstituted payouts in 2014 (it put them on hiatus during the subprime mortgage meltdown and the Great Recession), but has raised its payouts every year since then.
At the current share price, new investors would be getting an above-average 3.5% yield. You’d also be stepping in while the stock itself is priced at only 8 times next year’s projected earnings. That’s cheap by any industry’s standards under almost any scenario.
Kraft Heinz
If dividends are your thing — or at least one of your things — also consider longtime Buffett holding Kraft Heinz (KHC -0.63%). You know the organization. Kraft Heinz owns such familiar brands as Kraft cheese and Heinz ketchup, and was formed by the merger of their two namesake companies back in 2015. In fact, Buffett largely orchestrated the pairing.
Those who know this story also know the merger didn’t live up to its lofty expectations of improved efficiency and greater sales leverage. The resulting stock performance has been a disappointment, too. Kraft Heinz shares are trading well below their post-merger debut price near $71, and its 2020 rebound rally fell apart in 2021.
Indeed, the stock is on the verge of slipping to new multi-year lows as the company struggles with the same increases in operating expenses most other organizations are facing due to inflation.
There are reasons that Buffett is still sitting on 326 million shares of this stock, however. Potential — and its dividend. While the melding of Kraft and Heinz has seemingly shown little measurable net benefit so far, that could be on the verge of changing.
Although the impacts of it have been obscured by the noise of the COVID-19 pandemic (and its aftermath), Kraft Heinz has actually been making a long-overdue effort to turn things around. For instance, its innovation process now includes input from external/third-party participants. The company is also revamping its ability to serve institutional customers like restaurants and schools. Case in point: the introduction of its pre-packaged Lunchables for school cafeterias.
This turnaround effort is not yet complete, but investors should start to see tangible progress soon. In fact, they’ve actually already seen a glimpse of it. The company’s organic sales were up 4% in the second quarter despite economic turbulence, while gross profit margins widened.
And the dividend? The stock’s recent pullback has inflated the stock’s yield to a hefty 4.8%. All in all, Kraft Heinz shares offer a healthy combination of immediate income and good prospects for capital appreciation.
American Express
Last but not least, add credit card giant American Express (AXP -0.60%) to your list of Buffett stocks you may want to scoop up for yourself sooner rather than later.
Actually, it’s much less of a credit card company than familiar names like Visa and MasterCard. While the company issues some traditional credit cards that incur interest, most American Express cards are just no-limit charge cards, meaning cardholders are expected to pay their balance in full at the end of every month.
Charge card holders mostly use their plastic as a convenient alternative to cash, and for AmEx’s generous rewards. Given the economic headwind and subsequent delinquencies and defaults on payment cards, however, it’s a distinction that seems to make little difference.
The thing is, it does make a difference. The company doesn’t overtly tout it. But in that the right to use an American Express card often incurs a steep annual fee — several hundred dollars in some cases — in exchange for perks like travel discounts, its services are effectively aimed at higher-earning, more affluent consumers.
The proof? Saks’ Luxury Pulse (a barometer of consumer spending plans) update for September indicates that 58% of luxury shoppers intend to spend as much or more on high-end items within the next three months as they have in the recent past. That’s up from August’s reading of 53%. And in a separate but similar study, the Federal Reserve recently found that the most affluent 20% of the nation’s households are actually more cash-rich now than they were prior to the pandemic. The other 80%? They’re poorer.
It’s a dynamic that bodes well for American Express even if most investors don’t see it yet. Underscoring this opportunity is the fact that all consumers are increasingly using cards as a substitute for cash anyway.
As of the latest look, Berkshire was holding $26 billion worth of American Express shares, a position that’s been in place since late 2006, when shares were priced at about one-third of their current value.
This content was originally published here.
