Like most investors, Warren Buffett didn't have a great first quarter. Buffett's Berkshire Hathaway (BRK.A 0.32%) (BRK.B -0.06%) gained less than 1% through the end of March. That was enough to beat the S&P 500 index, but I doubt Buffett broke out his ukelele to strum and celebrate.
However, several Buffett stocks chalked up nice gains during the first quarter. The three top performers in Berkshire's portfolio were Sirius XM Holdings (SIRI -0.85%), Mastercard (MA 0.05%), and Moody's (MCO -0.65%). Here's what drove these stocks higher -- and what their prospects are for the rest of 2018.
Sirius XM Holdings
Sirius XM Holdings ranked as Buffett's biggest winner, with its share price jumping 16% in the first quarter. There were a couple of key factors behind the satellite radio stock's strong performance.
First, Sirius XM posted solid subscriber growth for 2017. The company's net gain in subscribers was lower than in the prior year. However, any growth for Sirius XM is great, because Sirius XM largely has fixed costs. Much of the added revenue from gaining more subscribers goes right to the company's bottom line.
Second, the company introduced its new 360L platform. The platform will allow subscribers to the Sirius XM All Access service to access more than 200 channels and over 5,000 hours of On Demand episodes of favorite shows. 360L offers personalized recommendations, with the vehicle's driver, front-seat passenger, and a backseat passenger each having their own individual listening profiles. The platform will initially be available in the 2019 Dodge Ram 1500 pickup truck, but 360L could be a growth driver for Sirius XM in other vehicles in the future.
Can Sirius XM keep the momentum going? It depends on the company's ability to continue attracting new subscribers and holding on to existing ones. With new products like 360L, its "radio of the future," the prospects for Sirius XM could be pretty good.
Mastercard wasn't far behind Sirius XM, with a first-quarter gain of nearly 16%. The global payments technology company has definitely been firing on all cylinders.
In its 2017 fourth-quarter update in February, Mastercard reported 20% year-over-year net revenue growth and a 33% year-over-year adjusted earnings per share increase. Fueling these strong results was a 17% jump in switched transactions -- the number of times one of the company's credit cards was used to make a purchase.
Mastercard stands to receive a nice windfall from U.S. corporate tax reform, in the ballpark of $450 million. The company plans to use this money in several ways, including investing in things that should generate growth, such as digital infrastructure and data analytics.
The stock isn't cheap, with shares trading at 24 times expected earnings. However, Buffett isn't the stickler for low valuations he was earlier in his career. He knows that sometimes, the best stocks come at a higher price. Mastercard certainly appears to be in that category. I expect Mastercard's success in the first quarter will carry over through the rest of the year.
Berkshire Hathaway owns close to 24.7 million shares of Moody's stock, but Buffett probably wishes he had even more. Moody's share price rose more than 9% in the first quarter, making it Berkshire's No. 3 best-performing holding during the period.
Like Mastercard, Moody's posted strong fourth-quarter results. Revenue shot up 24% higher than the prior-year period to an all-time high of $1.17 billion. The company reported solid earnings after experiencing a big net loss in the fourth quarter of 2016. While Moody's is best known for publishing credit ratings, its Moody's Analytics (MA) segment, which offers financial analysis and risk-management services, contributed the greatest revenue growth.
Also like Mastercard, Moody's should get a boost in 2018 from U.S. tax reform. The company's tax rate is expected to drop from 43.6% in 2017 to between 22% and 23% this year.
Moody's thinks 2018 should be another banner year. The company expects revenue growth in the low double-digit percentages. With the tailwind of tax reform at its back, Moody's should be able to increase its earnings per share by more than 40%. That's the kind of growth that should put a smile on Buffett's face.
Best pick for the future
Buffett's big winners of the first quarter could all continue to succeed over the long run. I think the best pick of the three, though, is Mastercard.
There are a couple of major growth drivers for Mastercard. Online sales continue to increase, most of which are paid for using credit cards. Business-to-business transactions also present a massive untapped market for payment processors. I think Mastercard is the kind of stock that could prompt Buffett to strum on his ukelele in celebration of big gains -- a scene that would be, of course, priceless.