You could certainly do worse than ride Warren Buffett’s stock-picking coattails. His Berkshire Hathaway portfolio boasts a market-beating long-term track record, after all. And he’s managed to beat the market with a simple buy-and-hold approach rather than constantly swapping out existing holdings for hotter prospects.
Just because a stock is currently in Berkshire’s portfolio, however, doesn’t mean it’s a great pick for you to purchase at this time.
With that as the backdrop, here’s a closer look at two Warren Buffett stocks most investors can plow into right now, and one you might want to steer clear of — at least for the time being.
Bank of America
If you’re looking for excitement, pass on Berkshire Hathaway holding Bank of America (BAC 0.92%). It doesn’t offer it.
But if you’re looking for reliable and consistent results, Bank of America is for you.
The company doesn’t need too much of an introduction. It’s the nation’s second-biggest banking name, with $2.5 trillion worth of assets on its books. Like most of its peers, it provides basic banking services like checking accounts and loans, as well as a variety of investment and wealth-management services. Also like most of the country’s bigger banks, Bank of America works with corporations to help them raise capital. It’s not a particularly complicated business, and it’s not as if one of these entities enjoys a hyper-competitive edge.
And yet, Bank of America is clearly something of a standout within the banking industry. It managed to add 130,000 new consumer checking accounts last quarter, and brought in 40,000 new brokerage and private-banking customers. Investment banking fee revenue improved 7% year over year despite the worldwide lull in capital markets activity. Its capital ratios and equity ratios are holding up pretty well, too, despite the wobbly economic environment.
Perhaps the only worry in last quarter’s numbers is the uptick in loan charge-offs, but even this growth was only slight. A mere 0.45% of the bank’s total loan portfolio was written off last quarter, versus 0.35% a quarter earlier and 0.26% in the same quarter a year earlier. That’s more than manageable.
The point is, even if it is less than exciting, this is a solid company in a business that’s never going to go away. The stock is currently sporting a dividend yield of 2.8%, paying shareholders for their patience.
Bank of America is Berkshire’s second-biggest holding, by the way. Its 1.03 million shares are worth a total of $35 billion.
Just when you think Buffett can’t possibly want to own even more of a particular organization, he buys more. Berkshire Hathaway’s purchase of 19.6 million shares of energy company Occidental Petroleum (OXY -0.84%) in the fourth quarter of last year brings Berkshire’s tally up to 243.7 million shares. The whole stake is worth $14.5 billion, or roughly one-fourth of the oil and gas company’s market cap.
It was a somewhat curious pick when Berkshire first established the position back in 2019. While Occidental is a fine company as far as energy stocks go, it’s not been a sector Buffett has seemingly been interested in for quite some time. That may have something to do with the fact that environmental concerns are slowly but surely working against traditional oil and gas companies. In this vein, the advent of renewable energy sources and the threat they pose to hydrocarbons may play a role in that relative disinterest as well.
However, as time marches on, it’s becoming increasingly clear that oil and natural gas are going to be needed for a long, long while. The International Energy Agency believes global consumption of oil, natural gas, and even coal will actually continue growing through 2030. Once reaching that peak six years down the road, demand will gradually fall all the way to 2050.
Translation: There’s still plenty of money to be made within this sector.
There are also plenty of stocks to choose from as a means of capitalizing on this persistent demand. Of all these options, Occidental is arguably one of the best. Under the leadership of Vicki Hollub, the company seems to have a confident grip on which assets are worth investing in, and which are worth letting go.
For instance, Occidental Petroleum is rumored to be working toward a sale of its natural gas pipeline operator Western Midstream Partners in order to pay down debt, but at the same time is acquiring CrownRock in an effort to expand its onshore operations in the Permian Basin. This kind of asset optimization ultimately sets the stage for wider profit margins.
Capital One Financial
At the other end of the spectrum, Buffett fans might want to hold off on any new positions in Capital One Financial (COF 0.71%) until the dust settles. The dust in question, of course, is the recent announcement that Capital One is making a $35 billion bid to acquire rival credit card company Discover Financial Services.
On the surface it seems like a reasonably good fit. The two organizations’ target markets and strategies are more similar than not. And there’s little doubt that this team-up could prove a true competitive threat to credit card powerhouses Visa and Mastercard. Discover even manages its own payments network (albeit a smaller one than Visa or Mastercard) that could eventually handle Capital One cards as well.
There’s a reason, however, that Capital One Financial shares didn’t budge following Monday’s announcement of the bid. Two reasons, actually.
One of these reasons is that while the strategic thinking behind the acquisition makes enough superficial sense, investors may not be entirely convinced the $35 billion price of the all-stock deal is worth it. Discover’s 2023 net income of just under $3 billion on revenue of $16 billion is respectable to be sure. But Capital One is looking to pay a premium price for a company with a wobbly asset base and growing delinquencies and charge-offs.
The other reason the market didn’t respond all that bullishly to the news is that the deal may not close. The U.S. Justice Department must first approve the pairing, and it’s been particularly wary of mergers within the banking sector lately. Green-lighting the acquisition won’t necessarily push Capital One shares higher, yet forbidding the deal could potentially upend the stock.
There’s also the not-so-minor reality that integrating two companies, each with their own well-defined structures and custom-designed tech, often turns out to be more complicated than initially expected.
The simple solution for interested investors? Look elsewhere — at least for the time being. You don’t need the drama that could soon unfurl here.