Warren Buffett has generated tremendous gains for the long-term shareholders of Berkshire Hathaway over the years. The legendary investor's buy-and-hold style has also inspired countless investors to attempt to follow his strategy. There's no better way to learn how to do it yourself than to pay attention to the stocks that the conglomerate buys and sells.
The Berkshire Hathaway portfolio today features stakes in more than three dozen companies that were either selected by Buffett himself or one of his investing deputies. And among those, three Motley Fool contributors believe that Amazon (AMZN -0.73%), Ulta Beauty (ULTA -0.96%), and American Express (AXP -0.71%) are particularly excellent buys right now.
Don't underestimate the king of e-commerce
Jennifer Saibil (Amazon): It's hard to believe that just two years ago, investors were worried about Amazon's future. Its sales growth was decelerating, it had just reported its first annual net loss in more than a decade, and it was starting to look stale.
What a difference two years make. In late 2022, ChatGPT launched its generative artificial intelligence (AI) platform, changing the world and breathing new life into the biggest tech companies, including Amazon. Since then, Amazon has released a string of AI solutions, and its AI business already boasts a multibillion-dollar run rate.
That's what's happening already, but the future AI opportunity is massive. CEO Andy Jassy keeps talking about the expected shift in company IT spending to the cloud, and it's not a small shift -- only 10% of information technology (IT) spending is on the cloud right now. He anticipates a watershed moment when the transition accelerates, and Amazon will be in position to benefit big when it does. It's already benefiting through accelerated Amazon Web Services (AWS) sales growth, which was 19% in the third quarter. Clients who want to be able to participate in the generative AI revolution are realizing that they need to get on a cloud platform like AWS.
Although its major investments are happening in AI solutions for AWS clients, the company is using the technology throughout its business. It now offers third-party sellers tools that can create full marketing campaigns from prompts and promotional videos from a single image. It's using its vast stores of data and machine learning to drive its advertising program, which continues to outpace other segments in sales growth.
Lesson learned: Don't underestimate Amazon. It has incredible momentum right now, and its AI platform is the wave of the future. You can buy the stock right now at close to its cheapest valuation in a long time, and if you hold it through the inevitable short-term ups and downs to come, you should be well rewarded in the long term.
This value stock is classic Buffett
Jeremy Bowman (Ulta Beauty): Earlier this year, Berkshire Hathaway bought shares of cosmetics retailer Ulta Beauty for the first time, and in many ways, it looks like a classic Buffett stock.
Ulta is a clear leader in its niche, with more than 1,400 stores around the country -- not including its roughly 800 store-in-store venues at Target locations -- rivaling peer Sephora. However, the stock has pulled back this year as the company's sales growth slowed, offering investors an opportunity to get into this longtime winner at a discount.
While Ulta's business may be maturing, the stock still has growth potential. Interest rates are predicted to come down, which in turn is expected to improve consumer confidence -- and that should help propel a rebound for Ulta and its stock. Additionally, at its recent Investor Day conference, the company revealed that it intended to accelerate the pace of new store openings, with a more ambitious long-term goal of growing its footprint to more than 1,800 stores. It's also seeing strong adoption of its loyalty program, which it expects to reach 50 million members by 2028.
As a business, Ulta also enjoys a number of competitive advantages. Most of its full-line stores feature hair salons, which gives customers an additional reason to visit them. That's also a service that e-commerce rivals can't provide. Moreover, its stores are much larger than other pure-play beauty retailers -- essentially, they're superstores that carry a wide range of products and brands, making Ulta a one-stop shop for beauty shoppers.
Right now, Ulta offers investors an excellent value at a price-to-earnings ratio of 15, and the company plans to aggressively buy back stock under the new $3 billion share repurchase program it announced last month. It's not a surprise that Berkshire Hathaway took advantage of the stock's discount to pick up shares.
This century-old business keeps finding ways to grow
John Ballard (American Express): American Express has been a staple of Berkshire Hathaway's portfolio for more than 30 years. Its strong growth this year speaks to why Buffett continues to hold its shares.
American Express has a solid business strategy of using cardholder perks and special offers to attract new customers who, in turn, will regularly use their cards and generate merchant fees. This spending-centric business model should continue to thrive as the economy grows over the long term.
In the third quarter, revenue hit a new high, growing 8% year-over-year, and this top-line growth also fueled strong growth in earnings. Management raised its full-year revenue and earnings guidance, and now expects 2024 earnings per share of between $13.75 to $14.05.
Buffett places a high value on the financial company's brand. The appeal of American Express is evident from its successes in winning over younger customers. Millennial and Gen Z consumers make up the company's fastest-growing cohorts, providing 80% of new U.S. accounts it acquired for its gold card last quarter.
American Express shares trade at a price-to-earnings ratio of about 21, which is on the high side for a financial services business, but it's still within the stock's historical trading range. If consumer spending picks up, it could light a fire under cardholder spending. With analysts expecting the company's earnings to grow at an annualized rate of 15% over the next five years, investors who buy the stock now could earn excellent returns.
