Warren Buffett’s success as an investor means that the stock portfolio within Berkshire Hathaway receive a lot of attention. While you always have to make your own buying and selling decisions, there are a couple of interesting stocks within Buffett’s investment vehicle that are worth thinking about today. The list includes Chevron(NYSE: CVX), Coca-cola(NYSE: KO)and American Express(NYSE: AXP). Here which ones are probably worth buying and which ones you might want to avoid.
Chevron is one of the largest integrated energy companies in the world. That means its business covers the entire spectrum of the sector, from upstream (oil and natural gas production) to midstream (oil pipelines) and even downstream (chemicals and refining). This provides some balance to the company’s financial results, as each segment of the industry performs in a slightly different way.
The bottom line is that, for an energy company, Chevron’s peaks and valleys are not as extreme as they would be if it only worked in the initial phase. This makes it a solid option for long-term investors looking to invest in the energy sector.
Helping everything move forward is one of the strongest balance sheets in the sector, with a very low debt-to-equity ratio of 0.17x.
The real attraction right now is the dividend. To start, the yield is 4.3%. And that performance is backed by a dividend that has been increased annually for more than three decades. That said, the average return in the energy sector is around 3.3%, indicating the lagging stock performance that Chevron is experiencing right now.
Some of that is related to an acquisition that is not turning out as well as expected. Some of it is tied to Chevron’s lackluster business results in the face of weak energy prices. However, if you have a long-term investment horizon, it’s probably worth buying this industry stalwart today. Outperforming the industry average while waiting for better days isn’t exactly a terrible thing.
Coca-Cola is one of the most recognized companies in the world and is usually a fairly expensive stock to buy. But a recent price drop has put the stock in an attractive range, assuming you don’t mind paying a fair price for a great company.
To provide some numbers, the dividend yield of this Dividend King is approximately 3.2%. That’s about halfway over the last decade, suggesting a reasonable price. Supporting that view are more traditional valuation metrics like price-to-sales and price-to-earnings, both of which are a bit below their five-year averages. While it wouldn’t be fair to suggest that Coca-Cola is a spectacular buy, it appears to be reasonably priced.
The real story, however, is what you get for that price. Coca-Cola’s business has strong margins, a healthy balance sheet, and a portfolio of beverage brands that is second to none (thanks in large part to its namesake soft drink). While investors may have some concerns about inflationary pressures, new weight-loss drugs and even the increasing scrutiny of snack foods, given the long and successful history here, it seems very likely that Coca-Cola will remain a leader in the industry. And that suggests that the dividend will continue to be paid and will continue to increase over time – exactly what a conservative income investor wants to see.
American Express is a payment processor focused on high-end consumers. This is a strong area, as wealthy clients tend to weather economic downturns relatively calmly. In fact, the fees the company charges for processing transactions tend to be quite reliable over time.
All in all, American Express is an attractive business. But as Benjamin Graham, the man who helped shape Warren Buffett, said, a great company can be a bad investment if you pay too much for it.
After roughly doubling its price in about a year, American Express is starting to look expensive. The company’s price-to-sales, price-to-earnings, price-to-cash-flow, and price-to-book ratios are all well above their five-year averages.
If you are a more active investor and care about valuation, you might want to make some profits here. It would be understandable if long-term investors would want to stay put, given the underlying business, but new investors should probably stay on the sidelines until there is a better entry point.
Even Warren Buffett, the Oracle of Omaha, makes mistakes. So you have to take the Berkshire Hathaway portfolio with a grain of salt. You also have to remember that Buffett tends to buy and hold, so the things that are in his portfolio today may not be things he would buy today.
But if you’re looking for some investment ideas, a look at Buffett’s stock list today raises interesting questions about Chevron, Coca-Cola, and American Express. The first two look like buys, but the last one seems overpriced right now.
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American Express is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
2 Warren Buffett Stocks to Buy Freehand and 1 to Avoid was originally published by The Motley Fool
