Warren Buffett is pretty clear about what he looks for in an excellent stock. If you look through his holdings, you'll notice that most of them demonstrate his investing criteria quite clearly. They're large, established companies with lots of cash and a purposeful role in the economy. They have a moat of some sort, often in their strong brands. These are companies that are hard to compete with and have enduring opportunities.
He's proven over time that chasing growth stocks isn't necessarily the way to beat the market, and finding excellent value stocks can not only beat the market, but do it without the headaches and anxiety of investing in risky stocks. However, even Buffett sells sometimes, and over the past two years or so, he's sold more than he's bought.
If you're looking for great ideas right now, consider Amazon (AMZN -1.45%), American Express (AXP -0.97%), and Moody's (MCO -0.92%). They're all excellent choices for the current environment. Here's why.
1. Amazon: Playing the AI trend
Amazon is not your typical Buffett stock, but it fits the criteria mentioned above. Buffett isn't big on tech stocks, and he didn't pick Amazon -- but he did greenlight it, and it's up around 130% since Berkshire Hathaway in 2019.
Buffett also isn't one to rise on new trends, and he hasn't jumped on the artificial intelligence (AI) bandwagon, but he's getting exposure to today's hottest buzzword through Amazon. It's a more secure way to get access to AI than some of the more speculative stocks that are focused on AI. Why? Because Amazon is so much more than AI, because Amazon is a cash-rich company that isn't going to go under is AI doesn't take off, and because Amazon has an arsenal of assets and tools that make it likely Amazon's AI business is going to succeed.
So far, it's already happening. AI is already generating billions of dollars for Amazon, and management sees this as just the beginning. CEO Andy Jassy often talks about the flip that going to happen when companies move to the cloud. Right now, he says 90% of spend is not on the cloud, but the coming shift is going to be a windfall for Amazon, because Amazon is the largest cloud services provider in the world. The generative IA solutions it offers make it an attractive choice for companies switching to the loud, and it adds new, high-profile clients every quarter, such as Capital One and Datadog in the third quarter.
Amazon is a no-brainer stock for any investor looking for exposure to AI trends, plus it offers so much more because of its e-commerce and other businesses.
2. American Express: The classic Buffett stock
Buffett has owned American Express stock for nearly 30 years, and it epitomizes Buffett's investing approach. He owns 21.5% of the company, and it accounts for 15.3% of the Berkshire Hathaway equity portfolio, its second-highest position.
It has a global brand that Buffett says "travels," and it targets the affluent consumer. It has refreshed its line of fee-based cards to appeal to a younger affluent demographic, and 80% of new gold card signups in the third quarter were from millennial and gen-z cohorts.
The fees American Express charges create loyalty and boost the bottom line, and unlike other credit card networks or banks, American Express has a complete credit card business supplying its own credit and enhancing its brand. Since its consumer base is generally more affluent than average, it's more resilient under pressure and spends more when the economy is booming. Revenue continues to increase, up 8% year over year in the third quarter, and net income is growing despite increased provisions for losses.
Amnerican Express also pays a dividend, although the yield is lower than usual at 0.89% because American Express stock is flying this year -- up 65% vs. 28% for the S&P 500. It's well-positioned to stay strong as the economy improves and consumers go back to buying.
3. Moody's: The Buffett stock no one talks about
Did you know that Buffett owns Moody's stock? You could be forgiven for not realizing that, since no one talks about it. But Berkshire Hathaway owns 13.6% of the company, quite a bit, and it accounts for 4.1% of the equity portfolio, also a hefty position. Did you know that Moody's has been a market-beating stock for years? If you didn't, you should dig in.
Moody's is a financial rating agency. It provides data and risk management solutions for clients, and it has a near-duopoly with S&P Global. That's the kind of moat Buffett loves. Its ratings are in demand throughout various financial cycles, and its solutions provide value independent of economic trends. When there's economic uncertainty though, like now, its services are crucial, and Moody's has been demonstrating phenomenal performance.
Revenue was up 23% in the third quarter over last year, and earnings per share increased 39%. CEO Rob Fauber attributed it to the company's ability to help clients operate in an "increasingly dynamic risk environment."
Moody's also pays a dividend, and like American Express, the yield has gone down, to 0.68%, as the stock soars. It's up 29%, just outdoing the market, but it has gained about double the market over the past 10 years. It's a solid anchor stock for any portfolio, as well as a strong choice for uncertainty.
