Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has nearly four dozen stocks in its portfolio, many of which were handpicked by Warren Buffett himself. While some Buffett stocks look rather expensive, there are some that could be excellent long-term bargains right now. Here's why our contributors think Buffett stocks Goldman Sachs (NYSE:GS), Visa (NYSE:V), and Phillips 66 (NYSE:PSX) are worthy of a closer look.
The next big universal bank?
Matt Frankel (Goldman Sachs): In its recently reported second-quarter earnings, Goldman Sachs delivered generally strong results. Investment banking revenue grew 18% per year, investment management revenue was up 20%, and despite market-value declines, assets under supervision grew by $15 billion.
But the real story with Goldman, especially in terms of future growth potential, is its small but rapidly growing consumer banking business. Its Marcus lending platform has been highly successful in its short history, and is a major reason that Goldman's debt and loan revenue soared by a staggering 67% over the past year.
And the bank could just be getting started. A recent presentation by new CEO (then COO) David Solomon indicates that Goldman has some lofty consumer-banking ambitions. The presentation listed potential offerings by Marcus that included credit cards, mortgages, auto loans, life and health insurance, checking accounts, and more.
There are two big points to keep in mind. First, Goldman Sachs has a massive competitive advantage over its big-bank peers, in that it doesn't have a legacy network of branches driving up its costs. It essentially has the cost structure of an online bank with the massive capital availability of a major financial institution.
And second, when Goldman jumps in to a new line of business, it really jumps in. The Marcus platform was quicker to reach major lending milestones than any other platform for which we have data, and we recently learned that Goldman's entry into the credit card business will be as Apple's co-branding partner.
It's tough to think of any single company to partner with that could make a more immediate impact. And there's no reason to think Goldman won't be as aggressive when entering any of the other areas of banking Solomon mentioned, such as mortgages.
The best part is that because of some mediocre results when it comes to trading revenue (which is likely to be a temporary issue), Goldman has underperformed the rest of the banking sector. In fact, its shares trade for one of the lowest price-to-book valuations among the big U.S. banks. So not only does Goldman Sachs have lofty growth ambitions along with the expertise and capital availability to achieve them, but its stock also trades rather cheaply.
Buffett is a fan of the payments industry
Neha Chamaria (Visa): Visa is absolutely crushing the market this year, and giving out strong signals that it'll continue to do so for years to come. This is thanks to an unbeatable "network effects" economic moat, a high-margin business model, and the e-commerce boom.
Visa earns fees every time one of its co-branded debit or credit cards is swiped to make a purchase anywhere in the world. Visa doesn't issue cards or lend money, but simply facilitates transactions through its payments processing network. That's where its business offers the greatest advantage: Visa has low capital expenditure requirements and doesn't face default risk from consumers using its cards. As for profitability, Visa has earned operating margins north of 60% and net profit margins above 30% since 2014.
Visa's recent rally has assigned premium valuations to the stock, but a company growing steadily at such a strong pace deserves no less. The company is looking at two solid growth catalysts: a global shift from cash to cashless forms of money, and e-commerce, which advocates the use of digital payments.
Let me clarify that Buffett didn't really bet on Visa -- his portfolio managers, Todd Combs and Ted Weschler, spotted an opportunity and invested in the stock. Yet the fact that Berkshire Hathaway owned nearly 10.56 million shares of Visa as of the last reporting date says much. In fact, here's what Buffett replied to a question about Visa and Mastercard during Berkshire's recent annual meeting: "I could have bought them as well. And, looking back, I should have." With Buffett also exclaiming that "payments are a huge deal worldwide," investors may consider Visa a Buffett stock worth buying.
Buffett still loves this oil stock
Matt DiLallo (Phillips 66): Warren Buffett doesn't sell stocks all that often, which is why it pays for investors to take notice when he does. One of his more recent sales was a portion of his holdings of refining giant Phillips 66. Overall, Buffett sold 35 million shares back to Phillips 66 for $3.3 billion in cash, paring his position by more than 40%.
On the surface, this sale seems to suggest that Buffett's view of the company has soured. However, that's not the case at all. Instead, Buffett commented on the sale by saying "this transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10%." His company cut its position to just below 10% of Phillips 66's outstanding shares, the number of which has been steadily shrinking over the years due to a stock buyback program. Buffett also said that he would "remain one of Phillips 66's largest shareholders and plan[s] to continue to hold the stock for the long term."
Why does Buffett want to maintain a large stake in Phillips 66? He believes it to be a "great company with a diversified downstream portfolio and a strong management team." Those same reasons make this stock worth buying now.
Matthew DiLallo owns shares of AAPL, Berkshire Hathaway (B shares), MA, Phillips 66, and Visa, and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. Matthew Frankel owns shares of AAPL and Berkshire Hathaway (B shares). Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and MA. The Motley Fool owns shares of Visa and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.