As one of the most respected portfolio managers in the world and chairman of Berkshire Hathaway, Warren Buffett continues to motivate value investors around the world. His investment formula is comprised of two parts -- knowing and understanding the company's business and execution capabilities in detail, and purchasing at a reasonable valuation.
Although it's an easy formula, it's far more difficult to put it into practice. Hence, it makes sense to follow the experts and pick at least a small stake in some of Berkshire Hathaway's portfolio stocks. Let's see why the following two stocks could prove to be compelling picks in 2025.
Bank of America
With Bank of America (BAC 0.28%) (a stock that makes up almost 11.3% of Berkshire Hathaway's portfolio), there is a lot to be excited about these days. Bank of America has shown resilience and financial fortitude despite several macroeconomic challenges.
The bank has demonstrated strength in consumer banking, wealth management, global banking, and merger and acquisition business lines. Subsequently, analysts are expecting the company's revenue and earnings per share to be $25.1 billion and $0.77, respectively, in the fourth quarter of 2024. These estimates imply a solid year-over-year revenue jump of 14.3% and an earnings jump of 133%, respectively.
The bank's net interest income (NII, a key revenue metric) is following the trajectory projected by management, with NII reaching the lowest point or trough in the second quarter of fiscal 2024, followed by significant improvement or an inflection point in the third quarter of fiscal 2024. Furthermore, management expects NII to continue growing and reach $14.3 billion in the fourth quarter of 2024.
While interest rate cuts were leading to NII contraction, the yield curve has now been uninverted -- meaning short-term interest rates are lower than long-term interest rates. Coupled with increased loan volumes in 2025, Bank of America stands to benefit from borrowing short-term and lending long-term.
The company has successfully managed its deposit relationships, as is evident from the increase in customer deposits from $750 billion in pre-pandemic times to $940 billion at the end of Q3 2024. The bank also added 360,000 net new checking accounts in Q3, marking the 23rd consecutive quarter of checking account growth.
Bank of America is also making rapid strides in digitization, since it is seeing 75% to 95% digital adoption across all lines of business. The company's AI-powered virtual assistant, Erica, has performed 2.4 billion client interactions by the end of Q3.
All this points to a healthy business, with NII on an upward trajectory, strong customer relationships, and a successful digitization strategy. Despite this positive picture, the stock is trading at just 1.26 times its book value -- a very reasonable multiple and notably below its 2022 peak of 1.6.
Berkshire Hathaway sold nearly 235 million shares of this company in 2024. However, the asset management company still owns just under 10% of the bank. Considering the company's solid tailwinds, Berkshire Hathaway's sales seem ill-timed. Instead, investors can consider picking a small stake in the stock to benefit from its upside potential, while controlling the downside risks.
American Express
American Express (AXP 0.28%) has emerged as a compelling pick in 2025 for several reasons. Its premium customer base and optimal execution capabilities made it possible to deliver strong results in Q3 2024. It had earnings per share of $3.49, despite only a 6% year-over-year rise in billings (implying a difficult demand environment).
Subsequently, the company raised its earnings guidance for 2024 from the previous estimate of $13.30 to $13.80 to a new range of $13.75 to $14.05. The credit quality of its premium customer base is impressive -- it only had a 1.9% write-off rate in Q3. The company's solid risk management is also evident in its robust reserve rate of 2.9%.
American Express is quite successful with younger customers. Spending across millennial and Gen Z accounts grew 12% year over year in the third quarter. These younger customers are also more loyal, as is evident in higher customer retention rates. The company also expects to double the lifetime value as compared to older generations.
American Express has also been focused on a product refresh strategy, enhancing existing products with new benefits and services. The company had refreshed 40 products globally by the end of Q3 and is expected to have refreshed even more by the end of 2024. A successful example of this strategy is the U.S. Consumer Gold card, which has demonstrated 30% higher acquisitions than the Platinum Card and has also become the No. 1 premium product for the younger demographic.
Despite a premium customer base, loyal younger clientele, and robust product refresh strategy, American Express stock trades at just 3 times sales. Hence, considering the reasonable valuation and the solid business model, American Express seems to be an attractive buy in 2025.
