It has been a chaotic last couple of years in the market, with stocks swinging wildly higher in 2021 and then crashing in 2022. Unfortunately, there may be more volatility to come with the outlook still uncertain.
When looking for good investment ideas, it’s never a bad idea to see what the pros are doing, and who better to observe than legendary investor Warren Buffett and his company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)? Buffett and Berkshire have been successfully investing since 1965, and they’ve been through many recessions and bull markets.
However, while it’s a good idea to watch what institutional investors are doing, you should never invest blindly, and always do your own research. Institutional investors can make mistakes too, and it’s not always clear what their motive behind each investment is. With that said, here are two Buffett stocks to buy hand over fist and one to avoid.
One of Buffett’s favorites
Berkshire has owned the credit card and payments company American Express (NYSE: AXP) for nearly three decades, and I could see the large conglomerate owning the stock for another three decades. Currently, AmEx makes up about 8% of Berkshire’s roughly $332 billion portfolio.
There are several reasons why AmEx is such a great stock to own in the credit card and financials space. For one, it has built a double-sided payments network that connects both its card customers and merchants that accept AmEx cards. These networks are difficult to build, so there is a high barrier to entry, and payment networks can also hedge inflation to a certain extent because as the cost of goods and services go up, so too will the fees they collect on each transaction. AmEx’s payments network can also help diversify revenue away from credit-card loan revenue. That said, AmEx has an incredibly strong and premium customer base that pays high annual subscription fees for several AmEx card products, spends at high rates, and is more resilient in recessions.
In 2022, AmEx delivered better-than-expected financial results amid a difficult operating environment. For this year, the company is guiding for 15% to 17% revenue growth and for earnings to grow about 15.7% at the high end of its range. In 2024 and beyond, AmEx is guiding for annual revenue growth of more than 10% and mid-teens earnings growth, which is very strong.
A classic Buffett value play
The large money center bank Citigroup (NYSE: C) is undeniably a controversial pick here. Shares have struggled since the Great Recession, and rightfully so, as the bank’s returns have lagged behind its peers.
But it does finally feel like Citigroup is on the right path. Under the leadership of CEO Jane Fraser, who took the reins of the bank at the start of 2021, Citigroup decided to sell off its international consumer-banking franchises, including its very profitable division in Mexico. Once all sales are complete, this should free up capital not only from the sales but also by making the bank simpler and hopefully reducing Citigroup’s regulatory capital requirements. The bank then plans to focus on areas of strength, such as investment banking and wealth management, where it can generate better returns. I’m also hopeful Citigroup will be able to improve its U.S. franchise and deposit base at some point longer term.
Citigroup’s transformation may not happen overnight, as the bank is dealing with regulatory issues, which have forced it to spend heavily to update its regulatory infrastructure and modernize the bank. But I’m hopeful the bank can return to repurchasing stock later this year. The bank only trades at about 62% of its tangible book value or net worth. JPMorgan Chase trades at a valuation that is more than three times higher, so Citigroup doesn’t have to do anything magical to create shareholder value at its current levels. Prior to last year, Berkshire hadn’t purchased the stock in more than two decades. Something feels different.
Avoid this luxury brand
The Buffett stock I am not super enthralled with is the luxury home-furnishing brand RH (NYSE: RH)). Berkshire’s position in RH amounts to just 0.2% of the total portfolio, so it’s certainly not an outsized position.
RH has been a great stock to own over the last five years, and it does appear to have carved out a niche among a high-spending population. But demand for its products is expected to stall as higher-income populations come under pressure from inflation and prioritize discretionary spending elsewhere. Recently, the company said it expects revenue growth for its fiscal year of 2022, which ends at the end of January, to be down as much as 4.5% year over year.
There’s also potential interest-rate risk if the Federal Reserve hikes interest rates to 6% or keeps them elevated for longer, which could hurt the housing market and put further pressure on demand for RH’s products. While this may still be a good long-term buy, with the stock trading at more than 16 times forward earnings, I see better opportunities elsewhere and no need to purchase this stock right now.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.