This Company Just Became Warren Buffett's Second-Biggest Stock Holding. Is It a Buy Today?
Warren Buffett was making headlines for some of his recent trades even before his 13F filing last week, which detailed all of Berkshire Hathaway's trades in the second quarter. But that latest Securities and Exchange Commission filing brought even more news, and not just about stocks he bought and sold. One of his best-loved stocks has climbed into the No. 2 spot in the Berkshire Hathaway portfolio, and it's a name Buffett-watchers know well.
What happened in the second quarter
Even before the 13F was released, investors already knew that Buffett had sold a chunk of Berkshire's top holding, Apple. Apple remains the largest position in the portfolio, but instead of accounting for almost half of its value, the tech giant now makes up just under 29%. That's still an outsized percentage, and no one should think that Buffett has lost faith in Apple, which he recently added to the list of stocks he would never completely sell.
The other stock sale investors already knew about was Bank of America, which is Buffett's favorite bank stock. Previously, it had been the portfolio's second-largest position, but he reduced the size of that stake in Q2. He also opened new positions in Heico and Ulta Beauty, and bought and sold smaller amounts of stock from several of his existing positions.
However, after that sale of Bank of America shares, American Express (NYSE: AXP) -- a position that Buffett hasn't touched in about 30 years -- is now his second-largest holding.
Why Buffett loves it
American Express is a classic Buffett stock, and he often sings its praises. He has long said that he would never sell American Express or his other favorite, Coca-Cola.
Buffett freely shares his investing wisdom and often talks about what he looks for in a stock. The first part of his formula is that he doesn't look for great stocks -- he looks for great businesses. According to his paradigm, a great company's stock is likely to appreciate over time while the business grows steadily and profitably.
The next thing he looks for are businesses with durable, long-term competitive advantages. American Express is an established company with a niche target market, rigorous credit management, and a top rewards program.
It has always targeted an upscale, resilient consumer demographic, and in recent years, it has successfully pivoted to focus on a younger cohort, which is driving new membership and should be a reliable growth driver for decades. Management anticipates revenue growth of about 10% this year with a strong increase in earnings per share, and it is targeting similar results for the long term.
Buffett mentioned American Express' "worldwide" brand as its moat. He often talks about businesses that participate in the American story, and American Express plays an important role in the U.S. economy.
Buffett also loves bank stocks. American Express isn't a classic bank stock, but it does operate using a closed-loop model, which means it underwrites its own loans, unlike rival credit card networks Visa and Mastercard. These are also Buffett stocks, for similar reasons, but he doesn't talk about them the same way he does about American Express. Banks have lots of cash, which gives them flexibility and opportunities, and they drive spending and the economy.
He has long said that he, along with Charlie Munger, who passed away last year, look for four things in an investment: A business that is understandable, has favorable long-term economics, able and trustworthy management, and a sensible price tag.
American Express has the kind of business Buffett understands, and its model leads to favorable long-term economics, which it has demonstrated over the decades that Berkshire Hathaway has owned its shares. Able and trustworthy management is how the company has been able to refresh itself to appeal to a new and different cadre of customers, and to grow revenues and increase profits despite periods of inflation and economic volatility.
It has also shown its commitment to creating shareholder value through dividend hikes and share buybacks -- common behaviors for companies Buffett invests in.
Finally, American Express usually trades at a discount to the S&P 500 average. Today, it trades at a price-to-earnings ratio of 19, while the S&P 500 average is 27.
Is American Express a good stock pick for you?
Buffett rarely ventures past value stocks, and American Express is very much a value stock. So if you're looking to add a high-growth stock to your portfolio now, the financial giant might not fit the bill. However, it does have a reliable record of growing sales and profits at a steady pace, and it has plenty of growth drivers to keep its business running smoothly.
As such, it's a great pick for value investors or any investor looking for an anchor stock to add to a diversified portfolio. You can expect more growth from American Express for the foreseeable future, as well as an increasing dividend.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions in American Express and Apple. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard, Ulta Beauty, and Visa. The Motley Fool recommends Heico and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
