When it comes to investing, few, if any, investors has more rapport and respect on Wall Street than Warren Buffett. After all, the man did figure out a way to turn less than $10,000 into more than $75 billion, as of the beginning of August, over the course of six decades.
But it's not necessarily Buffett's mammoth returns that have made him the face of Wall Street -- it's how he's done it. Buffett isn't a fancy investors by any means, nor does he care for the latest trading software or technical analysis trends. Instead, Buffett has made his living by investing in companies that he believes to be good values and hangs on to them for extended periods of time.
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The types of companies Buffett purchases through his conglomerate company, Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%), typically have strong competitive advantages and geographic reach. Buffett has often opined that the companies he buys should be sustainable regardless of whether a great or terrible CEO is running things, and this has been another key to his incredible returns. The result has been an outperformance in terms of book value growth for Berkshire Hathaway in roughly four out of every five years over the past five decades relative to the book value of the S&P 500. Needless to say, Berkshire Hathaway's shareholders aren't complaining.
However, investors are always looking to Buffett and his investments for inspiration. After all, following in Buffett's footsteps is exceptionally simple. It merely requires a little research, time, and patience. So, what Warren Buffett stocks should you consider buying in August? I'd suggest taking a gander at the following three.
American Express
One Buffett stock that's on the mend and still looking pretty inexpensive is credit processing facilitator and lender American Express (AXP 2.56%).
American Express ran into a brick wall when Costco Wholesale (COST 1.01%) announced in 2015 that it and AmEx's 16-year exclusive partnership would be ending. Costco was responsible for about 1-in-10 AmEx cards in circulation, so this was a major hit to American Express. Further losses were seen when JetBlue also announced that it was ending its co-branded credit card deal with AmEx in early 2015. Investors knew it would take some time before the company got over these initial stings, but all cylinders appear to be firing once again.
Image source: Getty Images.
To begin with, American Express has returned to its roots of catering to affluent clientele. Well-to-do cardholders tend to have fewer issues making their payments, and they're usually less influenced by minor fluctuations in interest rates and GDP growth. AmEx has also altered its approach by increasing the size of its merchant network, especially with small-and-medium-sized businesses, while at the same time reducing its operating expenses. AmEx wound up announcing a $1 billion cost-cutting plan in early 2016 that included layoffs, and its second-quarter results suggest these aggressive cost-cutting measures have worked.
More recently, monetary tightening from the Federal Reserve and slow but steady growth in the U.S. economy offers hope that gross purchasing from cardholders and interest rates (and thus interest income) can both head higher. AmEx is on solid footing for the first time in years, and investors should take note.
Delta Air Lines
Another Warren Buffett stock that could be worth a serious look is Delta Air Lines (DAL 0.43%), which is currently valued at just nine times next year's estimated earnings per share. That's well below the average forward P/E for S&P 500 companies and just the type of value that Buffett is seeking with long-term investments.
The reason Delta Air Lines' stock has been stuck in neutral since Dec. 2014 relates to the tumble in crude prices. Generally, falling crude prices would be cheered because it means lower fuel prices, including jet fuel prices for airlines. However, lower crude prices also reduced ticket-pricing power for airlines and incited a pricing war among the majors, as well as bare-bones airlines like Spirit Airlines. This has impacted Delta's ability to expand capacity and hurt key margin measures, such as passenger revenue per available seat mile (PRASM).
Image source: Delta Air Lines.
However, Delta began to show signs of life in its recently reported second quarter. The company wound up reporting 0.4% growth in capacity and PRASM of 2.5%. Further, it expects to report PRASM in the range of 2.5% to 4.5% moving forward. Delta's expanded network and new commercial initiatives have largely been credited with its first unit revenue growth in two and a half years. It's also seen nice revenue gains and customer retention from its SkyMiles credit card.
What's more, Delta Air Lines has placed a keen focus on boosting its shareholders yield through buybacks and dividends. In its latest quarter it wound up returning $748 million to shareholders, $600 million of which involved buying back shares of its common stock. Since implementing a quarterly dividend in 2013, Delta's payout has more than tripled to $0.2025 every quarter, which is good enough for a 1.6% yield. Buffett loves income, and you should as well with this airline juggernaut.
Sirius XM Holdings
Forget the fact that satellite-radio provider Sirius XM Holdings (SIRI 0.96%) recently hit its highest levels in 11 years after reporting better-than-expected second-quarter results. This is a legal monopoly that could still deliver substantial returns to patient investors over the long run.
For nearly a decade, Sirius XM's biggest issue has been its debt and its lack of recurring profits. However, those issues have mostly been placed in the rearview mirror, with nothing but a sea of clear competitive advantages lying ahead.
Image source: Sirius XM Holdings.
For starters, there are no other satellite-radio companies. The cost to launch a satellite-radio network would be immense, leaving just small-market terrestrial radio operators and select online radio companies as its competition. Few, if any, offer the diversity that Sirius XM brings to the table, meaning it's succeeded where others have struggled.
Perhaps even more important, Sirius XM's business model differs dramatically from terrestrial and online radio, which is why it can outperform in both booming and recessionary economies. Terrestrial and online radio are reliant on advertising revenue to drive growth. However, during recessions, advertising revenue can dry up. Sirius XM derived just $40.2 million of its $1.35 billion in revenue during its recently reported quarterly results from ads, with $1.11 billion coming from subscriptions. Subscriber revenue tends to be more consistent and higher margin, especially when you're the only satellite operator around. Sirius XM wound up adding 466,000 subscribers in the latest quarter, pushing its total subscribership to 32 million.
Though it still has a long way to go with paying down its debt, the company can also deliver strong cash flow growth in the years to come. It's become one of the most attractive legal monopolies worth buying.
