Apple

Buffett took decades to buy shares in Apple (NASDAQ: AAPL). But when he finally invested, he certainly made a profitable choice. At the end of last year, Buffett’s $31bn Apple shareholding was showing a $130bn profit even before taking dividends into account.

The company is now the largest shareholding in the portfolio at Buffett’s company Berkshire Hathaway. Although Buffett has sold some of his Apple stock – perhaps to avoid overconcentration in his portfolio as the price rose – he still owns most of the stake he built up.

Pundits seem constantly to be predicting imminent bad news for the Apple share price, due to a perceived lack of innovation. But I see that as positive. Apple’s disciplined approach of keeping its product portfolio small makes it simpler for the company to focus on a few blockbusters. It reduces cost and complexity in the business. The brand remains aspirational and has a large installed customer base. That helps generate massive cash flows. Operating cash flow last year was $2bn a week.

I have some valuation concerns about Apple given its price-to-earnings ratio of 26. That looks pricey to me. But the company does have a proven ability to produce strong earnings growth. For that reason, I would consider buying it for my portfolio.

American Express

Buffett’s position in financial services giant American Express (NYSE: AXP) has an interesting history. He bought it during what was known as the ‘salad oil scandal’. A small company was involved in a form of invoicing fraud. But the consequence was huge for a number of financial services shares.

The news hammered the American Express share price. But Buffett reckoned it was a storm in a tea cup. The business concerned was connected to only a very small part of American Express’ revenue. So when the stock market beat down the Amex share price, Buffett loaded up. He now owns 19.9% of the company. That stake cost him $1.3bn but has risen in value to $24.8bn.

It is a classic example of Buffett “being greedy when other investors are fearful”. The basic economics of American Express give it what the ‘Sage of Omaha’ calls a moat, or competitive advantage. The brand is prestigious and has a large installed base of both users and merchants. But Buffett was able to buy it at an attractive price. Can I?

Currently, Amex trades on a P/E ratio of around 18. I would prefer it to be cheaper, so if there is a pullback in the share price I would consider buying it for my portfolio. I see Amex as the sort of business that has excellent long-term prospects. But growing economic weakness in key markets like the US could see borrowers defaulting more. That may hurt profits. If that concern leads to a share price fall, it could give me a buying opportunity.

Coca-Cola

Another longstanding holding in Warren Buffett’s portfolio is the drinks maker Coca-Cola (NYSE: KO). As well as its namesake sugary drink, the company owns a wide portfolio of brands in markets worldwide.

Again, this is a business with a classic Buffett-style moat. Only Coca-Cola has the brand name and formula for its most famous drink. It also has a complex set of distribution arrangements that effectively mean it is the default soft drinks supplier to many retailers and other drinks outlets. The manufacturing cost is low, which means Coca-Cola can benefit from high profit margins.

Although there is a risk that health-conscious consumers will increasingly shun ‘unhealthy’ drinks, the company has been trying to diversify its portfolio for years to help it reflect this concern. Meanwhile, the underlying business model remains attractive. I think it could stay profitable for decades to come.

But while the Coca-Cola share price has increased 22% over the past year, I find it hard to get excited about the prospect of owning the shares. At 28, its P/E ratio is higher than Apple’s – but I do not think its earnings growth prospects are anywhere near as promising. At the moment I would not buy Coca-Cola for my portfolio.

HP

Warren Buffett’s latest shareholding, announced this month, is in computing equipment company HP (NYSE: HPQ).

I find it hard to see HP as a great company. It has some brand recognition, both in computers and printers. But if I think about the sort of comments I hear from Apple customers, the comparison becomes stark. I cannot remember anyone ever raving to me about an HP product let alone the HP brand.

Where is the moat here? The business model may be attractive – overpriced print cartridges are a classic example of the so-called razor and blade model where pricey refills offer attractive profit margins. But that is true of any printer maker, not just HP.

I just do not see what is compelling about the HP business and would not buy it for my portfolio.

Verizon

Another company that does not excite me much is telecoms provider Verizon. But while the brand may not elicit much emotional response from me, the business model is something I do find attractive. Due to the high capital expenditure required to build and run mobile networks, companies like Verizon that do it have a moat. Its huge installed customer base gives it economies of scale.

Demand for mobile telecoms is probably going to keep growing, in my opinion. It is a highly cash generative business. One risk is that that cash gets used up to fund the capex. But when that does not happen, a company like Verizon can generate big profits to fund dividends. With a 5.3% dividend yield, I would be happy to tuck Verizon away in my portfolio.

Investing like Warren Buffett

What works for Buffett will not necessarily work for me as an investor. But using a similar approach of looking for excellent companies at attractive prices, I could see myself buying several of these shares for my own portfolio.

Let’s explore whether I’d buy these Warren Buffett stocks today.

Coca-Cola — Warren Buffett’s oldest stock position

Warren Buffett first bought Coca-Cola (NYSE: KO) stock in 1988. Accordingly, the soft drinks manufacturer was actually a stalwart of Buffett’s portfolio even before the relatively mild US recession in the early 1990s.

Berkshire acquired 400m Coca-Cola shares at around $3.25 per share. It’s never sold a single one. The Coca-Cola share price is now over $65, meaning the holding is valued in excess of $26bn today — a stunning unrealised gain of over 2,000%. On top of that, Warren Buffett (or at least, Berkshire Hathaway) earns an annual dividend yield above 50% on his initial investment.

Today, Coca-Cola’s in good financial shape. Net revenues grew 17% in 2021, operating income was up 15% and cash flow increased 28%. Moreover, the company continues to innovate with a new product range for 2022, including Coca-Cola with Coffee Mocha.

Based on consensus forecasts, the stock is arguably pricey at present, trading at 27x current year earnings. Nevertheless, I think there’s still value in this high-margin, cash-generative business that has increased its dividend regularly for the past 59 years.

American Express — Berkshire’s third-largest stock holding

Warren Buffett first invested in American Express (NYSE: AXP) back in 1963, when it was a young company mired in scandal, but began building the stake he owns today in 1993. Currently, the billionaire holds 151.6m shares, worth $29bn in total.

The American Express share price is up nearly 22% over 12 months. Last year, revenue grew 17% and total cardholder spending rose 25%. Additionally, AmEx recently raised its dividend by 20% to $0.52 per share.

Looking ahead, American Express stock should benefit from a continued recovery in the travel sector. Travel consultancy and associated card rewards have been historically important revenue streams.

As monetary policy tightens, the US economy may enter a recession in 2023. This could negatively impact the AmEx share price if consumer spending falls. However, the card payment company has always rebounded after recessionary shocks before and its long-term prospects still look good to me.

Would I buy?

A bear market could be imminent, but studying Warren Buffett’s long-term investing approach eases my worries. Buying and holding carefully selected stocks through thick and thin has handsomely rewarded the Oracle of Omaha over decades.

American Express and Coca-Cola currently trade near all-time highs. This could mean further upside is limited. Indeed, Berkshire built both positions years ago at considerably cheaper prices than today. However, they’re still in its top four stock market holdings, with no signs of selling.

In Buffett’s own words: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” AmEx and Coca-Cola are clearly wonderful companies in his view. That’s good enough for me.

Warren Buffett has a unique gift for identifying wonderful companies at wonderful prices. I’ll settle for those same companies at fair prices. I’d buy both shares today.

Salad oil scandal

His initial investment in American Express was born out of a 1960s scandal. A salad oil company took out large loans using its product inventory as collateral. However, it filled up its oil tanks with sea water, deceiving lenders, including American Express.

AmEx shares plummeted on news that it had been conned into lending $175m+. In fact many investors feared this would be the end of the company. Not Warren Buffett though. While others were fearful, he snapped up shares in what he saw as a wonderful business. His initial investment totalled roughly $1.3bn and it prove to be both a lucrative and defining investment for the Oracle of Omaha.

Today, his holding company Berkshire Hathaway owns 19% of American Express. Amex is its third biggest holding, only behind Apple and Bank of America. And impressively, he’s made around 20 times his money on the investment, excluding dividends.

Still a wonderful company at a fair price?

AmEx’s popular credit cards and reward schemes are seen as high-status. Its competitive advantage gives the company pricing power, of which it has recently taken advantage, raising annual fees for its platinum credit card.

Buffett has invested in competitors Visa and Mastercard but notably trimmed his positions in both payment giants this year. Both have seen their share prices fall around 10% year to date while AmEx has risen over 28%. Yet despite this strong 2021 performance, the Omicron variant has triggered a sell-off and the stock is 17.5% down from its October highs. That’s unsurprising given that much of its revenue and many rewards have travel links. Therefore any travel restrictions could trigger further slumps in the share price.

But travel aside, AmEx makes the bulk of its revenue, like other card operators, by taking small percentages of every transaction where one of its cards is used. This makes the company a potential inflation hedge as its revenue should rise in line with price increases.

When compared to its major competitors, AmEx looks to be trading at a fair and arguably cheap price. Its price-to-earnings (P/E) ratio stands at 16 compared to between 39 and 40 for Visa and Mastercard. Its P/E is also considerably lower than that of the S&P 500 at 28.5. Additionally, American Express yields an attractive 1.1% which is considerably higher than its credit card rivals.

Warren Buffett isn’t selling. Should I buy?

AmEx is certainly not trading at the wonderful price Warren Buffet paid in the early 1960s. What’s more, if Covid and its variants prove to be travel and general spending suppressants beyond the short term, the AmEx share price could head further downwards. But unfavourable market conditions may present an opportunity for me to add discounted AmEx shares to my portfolio. Ultimately, I make investments with a long-term horizon and I’d be more than happy to add this Warren Buffett favourite to my portfolio before the end of the year. Especially if investors continue to be fearful. 

I still think Apple stock is worth buying today however. Here, I’ll explain why. I’ll also highlight another top Buffett stock I’d buy right now.

Why I’d buy Apple stock today

While Apple shares have had a strong run, I think they have the potential to climb higher in the years ahead. In the near term, the company looks set to get a massive boost from the rollout of 5G networks.

This is creating strong demand for new handsets. It’s worth noting that, according to Bloomberg, Apple is asking its suppliers to ramp up production of its next-generation iPhones by 20%.

Meanwhile, in the long term, we can expect to see Apple become a bigger player in a number of industries, including payments and healthcare. Apple CEO Tim Cook is hoping that healthcare will be its biggest contribution to mankind.

As for the stock’s valuation, I don’t think it’s stretched. Currently, Apple sports a forward-looking P/E ratio of 29. I think that’s pretty reasonable when you consider Apple’s track record, its long-term growth potential, its level of profitability, its cash flow, and its balance sheet.

Of course, there are plenty of things that could cause Apple’s share price to fall. Regulatory intervention, for example, could hurt the shares.

I think the overall risk/reward profile here is very attractive however. It’s worth noting that, recently, analysts at JP Morgan raised their target price to $170 from $165.

Another Buffett favourite

Another Buffett stock I’d buy today is credit card company American Express (NYSE: AXP). This is a stock he’s owned for a long time (first investing here in the early 1960s). Currently, it’s his third-largest holding.

Like Apple, I think this stock has both short- and long-term appeal. In the short term, it should benefit as the global economy reopens, economic conditions improve, and consumer spending picks up. It’s worth noting that the group reported a 509% increase in net income in the first quarter of the year as it freed up funds it had set aside to cover credit losses.

In the long run, American Express should benefit as the world moves away from cash. Over the next decade, trillions of transactions are set to shift to credit cards and electronic payments.

I’ll point out that I’m not the only one who likes this Buffett stock. Recently, analysts at Goldman Sachs upgraded the stock to ‘buy’. Their price target for the stock is $225 – 30% above the current share price.

One risk to consider here is further Covid-19 setbacks. These could impact economic conditions and potentially lead to more credit defaults. Competition from other players in the financial industry is another risk to consider.

I’m comfortable with the risks however. I think this is a great stock to buy in the current environment.