The stock market is close to its all-time high, and it is increasingly difficult to find attractively valued businesses to invest in. Even in Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) stock portfolio, which is known for its Warren Buffett-selected value stocks, there are lots of stocks trading for extremely lofty valuations.
Fortunately, this isn't the case across the board. Here are three Buffett stocks that look appealing from a long-term perspective right now.
Berkshire Hathaway's stock portfolio
Berkshire Hathaway's stock portfolio consists of about 45 stocks. Many of these were hand-picked by Buffett himself, while in recent years, Buffett's two stock-pickers, Todd Combs and Ted Weschler, have been given increasing authority to invest Berkshire's capital without obtaining Buffett's approval.
Although Berkshire owns nearly four dozen stocks, there is tremendous variation among the sizes of the positions, and the portfolio is rather top-heavy. As of November 2017, Berkshire's stock positions range from a high value of $25.7 billion (Kraft Heinz) to a low of just $41,676 (Verizon).
Sixty percent of Berkshire's stock portfolio is concentrated in just five stocks: Kraft Heinz, Wells Fargo, Bank of America (NYSE:BAC), Apple, and Coca-Cola.
While it's tough to look through Berkshire's stock portfolio and call any of them "bad investments" or "too risky," there are a few that stand out as bargains right now. Synchrony Financial (NYSE:SYF) is a unique credit card issuer with an impressive profit margin, Bank of America is a much-improved bank that's consistently getting better, and Southwest Airlines (NYSE:LUV) is a well-run airline that could be a big beneficiary of tax reform.
A credit card company you may not have heard of
Synchrony Financial is one of the newest additions to Berkshire's portfolio, first appearing on the company's second-quarter SEC filings.
Although it's not a household name like most other credit card issuers, Synchrony is the largest issuer of private-label credit cards in the U.S. and was formerly General Electric's consumer finance arm. Synchrony issues retail credit cards for companies including Amazon.com, Wal-Mart, Lowe's, and Gap, just to name a few. The company also provides promotional finance programs for many retailers and is the issuer of the CareCredit healthcare financing platform.
Recent results look promising and don't appear to be fully reflected in the stock price yet. Over the past year, the company's loan portfolio grew by 9%, the number of active customer accounts grew by 4%, and net interest income grew by 11%. What's more, efficiency improved, and the net charge-off ratio improved by 47 basis points from the second quarter.
Because store credit cards generally charge higher interest rates than standard credit card products, Synchrony achieves an impressively high margin and generates impressive returns on equity, yet it trades at just over 12 times trailing-12-month earnings.
A steadily improving bank that just went on sale
Bank of America is (sort of) a recent addition to Berkshire's portfolio as well, with 700 million shares of the bank having been acquired in August. However, this wasn't a standard purchase: Buffett made a deal with Bank of America several years ago that gave Berkshire warrants to buy the stock. In other words, Buffett has been a Bank of America investor for years; he just didn't own the company's common stock until recently.
Simply put, Bank of America has done a tremendous job of turning itself around in the post-crisis years, and now it's starting to look like a rock-solid banking institution is supposed to. Key profitability metrics of return on assets (ROA) and return on equity (ROE) are approaching their benchmark levels for the first time in years, efficiency has improved, and charge-offs are low. Loan and deposit growth have also been impressive for some time now.
Bank of America also has several positive catalysts that could drive profits higher over the next few years. Rising interest rates should translate to better interest margin, which could mean billions in additional profits. If banking regulations are rolled back, as many Republican leaders support, it could reduce Bank of America's compliance expenses and make it generally easier to do business. And tax reform could save the bank billions on its corporate tax bill, as its effective tax rate is over 31% currently.
The financial sector has pulled back a bit recently, and now could be a smart time to buy this long-term winner.
This stock could be a big beneficiary of tax reform
Buffett surprised most of his loyal followers when he bought shares of all four major U.S. airlines, in direct contrast to negative comments he had been making about the industry for years. Basically, Buffett feels that the consolidation that's occurred in the airline industry in recent years has fundamentally changed the business.
Buffett's logic certainly makes sense, and Southwest Airlines is one that could do especially well in the coming years.
Specifically, since 99% of Southwest Airlines' sales are from within the U.S., the company could be a major beneficiary of corporate tax reform. Over the past decade, Southwest Airlines' average effective tax rate has been 38%, which includes applicable state and local taxes. However, it's fair to say that if the corporate tax rate is lowered from 35% to 20% as both the House and Senate tax proposals are calling for, the company could see its after-tax profits soar.
The bottom line on Buffett stocks
To be clear, I don't suggest buying a stock simply because a billionaire owns it, even if that billionaire is named Warren Buffett. Many billionaires own stocks that look expensive, or may be appropriate for them but not for your investment goals. It's always important to do your own research and make sure that a stock looks attractive and is appropriate for your objectives.
Having said that, these three stocks in Berkshire's portfolio look especially attractive right now, and are worth a look for investors who have a long time horizon.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel owns shares of Apple, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), and Verizon Communications. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Lowe's and Synchrony Financial. The Motley Fool has a disclosure policy.