There are roughly 50 or so public stocks in Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) portfolio, dispersed between the core picks of Buffett and partner Charlie Munger, as well as their two younger lieutenants, Todd Combs and Ted Wechsler. Buffett and his team focus on high-quality, wide-moat businesses that can be purchased at reasonable-to-cheap prices, with the goal of holding for the long term.
With so many securities, a few high-quality names in the Buffett portfolio are likely to be out of favor for one reason or another at any given time, setting up a compelling entry point for Foolish long-term investors. Here are three Buffett picks that look quite enticing at the current moment.
The stock of Amazon.com (NASDAQ:AMZN) is well-known to many, but it's relatively new to the Berkshire portfolio. The stock was bought by one of Buffett's two younger lieutenants in the first quarter of 2019 and was subsequently increased in Q2.
While Amazon isn't typically thought of as a Buffett-esque value stock, Amazon does have deep competitive advantages in not one but virtually every one of its business lines. This includes dominant, leading market share in both e-commerce and cloud infrastructure-as-a-service, two high-growth sectors of the economy. E-commerce has also been bolstered by the company's Prime subscription program, which surpassed the 100-million subscription mark in January.
With the backing of its massive consumer platform, Amazon is now expanding into new areas such as online advertising, which is estimated to exceed $11 billion in revenue this year; shipping services, which puts it squarely in competition with giants FedEx (NYSE:FDX) and UPS (NYSE:UPS); and healthcare, a huge market that could very well be transformed by the "Amazon touch."
Nevertheless, Amazon has actually underperformed many large-cap tech peers this year:
This may be due to a number of reasons, including Amazon's outperformance in the years prior to 2019, concerns over antitrust regulations coming from Washington, and the recent loss of the JEDI cloud contract with the Department of Defense to Microsoft.
Nevertheless, I think these concerns may be overblown. Though Amazon has a leading share in e-commerce, it only generates around 4% of overall U.S. retail sales. In addition, the loss of the JEDI contract seems to fly in the face of Amazon having an unbeatable monopoly in the cloud space.
On the plus side, the company's recent investment in one-day shipping should accelerate core e-commerce revenue over the next year, while the cloud opportunity remains a long-term, high-margin growth driver. Basically, Amazon's 2019 may be a mere cooling off from several years of stock outperformance.
Over the long term, I'd expect Amazon's wide moats, excellent management under CEO Jeff Bezos, and long-term approach to benefit patient shareholders. As such, any time the stock lags over a period of quarters or years, it's probably a good idea to scoop up some shares.
Beleaguered bank Wells Fargo (NYSE:WFC) has actually been in the Berkshire Hathaway portfolio since 1989-1990, when Buffett bought in after the savings and loan crisis of the late 1980s. While it has been a huge winner for Buffett over the long term, Wells Fargo ran into some trouble beginning in September 2016 -- trouble that continues to this day.
In 2016, a series of customer abuses were uncovered. The first involved Wells employees opening customer accounts without permission, in order to hit the company's aggressive cross-selling incentives. In July 2017, the bank's internal investigation found it had falsely charged some 570,000 auto loan customers for failing to maintain car insurance. Then in mid-2018, a software glitch was discovered at the bank, which may have caused up to 545 erroneous foreclosures going back to 2010.
These abuses led to the Federal Reserve implementing an asset cap on the bank in early 2018, essentially preventing Wells from growing over its $2 trillion in assets. They also led to the firing of not one, but two CEOs.
Yet entering 2020, Wells may be on the brink of getting past these reputation-damaging scandals. On Sept. 27, the company hired Charles Scharf as its new, permanent CEO, recruiting him away from Bank of New York Mellon, four months after former CEO Tim Sloan resigned. That fills a leadership gap that added to uncertainty around the bank.
Second, it's possible Wells' asset cap could be lifted in the near future. Former CEO Tim Sloan had originally thought the asset cap would be lifted in the first half of 2019, only to postpone that timeline earlier this year.
Wells Fargo now has a new CEO and has spent two years in the penalty box, so the Federal Reserve could find its way to lifting the cap in 2020 -- though admittedly, there are no guarantees on this. Yet Wells has a price-to-earnings ratio of just 11.6 and a dividend yield at a robust 3.8%, so now may be a great time for investors to give the bank a fresh look.
Finally, another stock chosen by one of the younger Berkshire stock pickers is Verisign (NASDAQ:VRSN). The company is a unique mix of tech stock and utility, as it's the exclusive registry for the .com and .net top-level domains (TLDs), as well as the .gov, .jobs, .cc, and .tv TLDs. If you have a website under any of these TLDs, you're likely paying Verisign a regular annual subscription fee of either $7.85 for .com or $9.20 for .net.
Verisign almost acts like a government entity, since it's a near monopoly that provides a key societal function. However, Verisign is allowed to operate as a private company under the authority of the Internet Corporation for Assigned Names and Numbers (ICANN), which is a non-profit consortium of governments, corporations, and individuals that regulate the core functions of the internet.
Verisign has been keeping the internet up and humming since it acquired Network Solutions back in 2000. Since the company has performed such an important function for decades, it would be risky for ICANN not to renew its current agreement with Verisign, which runs through 2024.
So why is Verisign so compelling now? Thanks to a 2016 amendment to the agreement with ICANN, Verisign will have the right to increase prices on the .com name by 7% per year for the next four years, beginning in October 2020. For context, Verisign hasn't raised prices on .com since 2012, and .com makes up a majority of its revenue, so this is a pretty big deal.
Despite flat .com pricing, Verisign has still been able to increase margins over the past few years, since the domain name base continues to grow in the low-to-mid-single digits, and Verisign has kept costs flat. Therefore, each 7% price increase could go straight to Verisign's bottom line, if and when it happens.
While the stock is by no means cheap at 35 times earnings, this baked-in profit growth and wide-moat business model makes Verisign a great defensive play heading into 2020.