Key Points
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Berkshire Hathaway owns about 30 stocks, and three look like particularly good opportunities.
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American Express and Ally Financial are two very different banks with a lot to like.
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It’s not difficult to see why Berkshire’s leaders like Alphabet so much.
- 10 stocks we like better than American Express ›
Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) owns a collection of more than 60 businesses, but is perhaps best known for its massive stock portfolio. According to its latest SEC filings, Berkshire owns about 30 publicly traded stocks worth more than $300 billion.
To be sure, there’s a solid investment case to be made for most of them. After all, Berkshire’s leaders focus on businesses with clear competitive advantages and aim to buy at attractive valuations. But there are three in particular that I’d buy shares of right now, including one that Berkshire trimmed in the second quarter.
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Without further delay, let’s get right into the stocks.
A financial powerhouse
The first is American Express (NYSE:AXP), a stock Berkshire has owned for decades and the company’s second-largest investment. Amex is best known as a credit card issuer, but it serves as both the lender and the payment network, a model used by only a couple of companies.
Image source: Getty Images.
This means that Amex earns interest income on the money it lends, and also gets fee income from every dollar its cardholders spend, whether they carry a balance or not. The “why now” is because of Amex’s affluent cardholder base, which should help it hold up better if consumer spending pulls back.
Tremendous growth and profitability
Second is Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), which is the stock Berkshire is buying most aggressively right now. In fact, after spending billions more in the second quarter, the Google parent company is now Berkshire’s fourth-largest investment.
Both main sides of Alphabet’s business (Google Services and Google Cloud) generate excellent cash flow, and the recent results from Cloud in particular have been impressive. With 82% revenue growth in the latest quarter and a $514 billion backlog, it is growing faster than its larger peers and is taking market share. Meanwhile, despite rapid growth and tremendous profitability, Alphabet trades for a very reasonable earnings multiple compared to its mega-cap peers.
A bank Berkshire has been selling
In the second quarter, Berkshire trimmed its stake in Ally Financial (NYSE:ALLY) by about 7%. For context, Berkshire sold shares of three bank stocks, with the other two being $1.7 billion worth of Bank of America (NYSE:BAC) and a 58% reduction in its Capital One (NYSE:COF) investment.
However, I’m a buyer of Ally. It’s arguably the most successful branchless bank, with well over $100 billion in retail deposits. It’s also the largest auto lender in the U.S. that isn’t owned by an automaker.
In a higher-for-longer interest rate environment, Ally’s net interest margin tends to widen as loan interest rates grow faster than deposit costs. Plus, Ally has been trading at a significant discount to book value, despite strong business results. To be fair, this is the most economically sensitive stock on this list, but Ally’s risk-reward dynamics look attractive right now.
It’s also worth noting that trimming 7% of Ally was most likely a position-sizing move rather than a bearish outlook from Berkshire. Specifically, Berkshire owns about 9% of Ally and aims to keep its stake below the 10% threshold that triggers increased regulatory scrutiny. Ally regularly buys back stock, so this could be simply to proactively avoid reaching 10% ownership over time.
The bottom line
All three of these stocks have attractive risk-reward profiles at their current prices, and are three very different businesses. Amex is a nice financial sector play that should hold up well if consumer confidence continues to erode. Alphabet is one of the most attractively valued ways to invest in the AI build-out. Although Ally has the highest consumer credit risk of the three, it is a leading lender with a strong history of responsible growth and risk management.
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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Ally is an advertising partner of Motley Fool Money. Matt Frankel, CFP® has positions in American Express, Bank of America, and Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, American Express, and Berkshire Hathaway. The Motley Fool recommends Capital One Financial. The Motley Fool has a disclosure policy.
