It's been a weird year for both the stock market and Warren Buffett's Berkshire Hathaway (BRK.A 0.63%)(BRK.B 0.58%). The former has contended with the steepest bear market decline in history, as well as the quickest rebound from a bear market low to new all-time highs. As for Buffett, he predominantly sat on the sidelines as equities tumbled. It was an odd time for inaction from an investor who typically thrives on being greedy when others are fearful.
Yet Berkshire Hathaway's portfolio hasn't remained static. In fact, it could be argued that it's more active than ever, with Buffett's investment lieutenants, Todd Combs and Ted Weschler, exerting greater influence over new investments.
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Buffett's company has a new fastest-growing stock
While there have been a number of additions to Berkshire Hathaway's portfolio that Buffett didn't specifically buy, the recent purchase of 6.125 million shares of data cloud company Snowflake (SNOW 0.94%) has raised eyebrows like never before.
Snowflake isn't just a growth stock -- it's a hypergrowth company. According to Wall Street, Snowflake's sales are expected to grow from the nearly $265 million reported in fiscal 2020 to $3.8 billion by fiscal 2025. For those of you keeping score at home, that's a compound annual growth rate of 70% over the next five years.
There are two factors that really make Snowflake stand out from the crowd. First, it allows its clients to pay as they go. Instead of locking its customers into static subscriptions, Snowflake charges based on the amount of data and Snowflake Compute Credits that an enterprise uses. This model creates improved pricing transparency and should save most businesses money.
Secondly, since Snowflake's solutions are layered atop the most popular infrastructure cloud-service providers, it allows its customers ease of sharing. In other words, it's not easy to share cloud data if one party is using Alphabet's Google Cloud and the other is on Microsoft Azure. But if both parties are using Snowflake, this infrastructure barrier no longer exists.
Three Warren Buffett stocks to buy instead of Snowflake
There's no question that Snowflake is innovative and exciting -- but it's also extremely pricey. At more than 100 times forecasted sales for fiscal 2021, investors would be paying through the nose to get their hands on Snowflake. Rather than chasing this emotionally supercharged stock, here are three Buffett stocks I'd suggest buying instead.
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Mastercard
If growth stocks are your thing, one of the safest long-term bets that can be found in Buffett's portfolio is payment facilitator Mastercard (MA +3.47%). The way I see it, there are three reasons Mastercard can't be stopped over the long run.
First off, Mastercard, like most financial stocks, is a cyclical company. This is to say that it does well when the U.S. and global economy are expanding. Even though recessions and contractions are natural parts of the economic cycle, periods of expansion are often significantly longer than recessions. For every few quarters that Mastercard's business struggles, there will be years where payment volume across its processing networks surges.
Secondly, it's important to note that Mastercard is a payment facilitator for credit and debit transactions, not a lender. While lending can be fruitful during periods of economic expansion, it would also leave the company exposed to rising credit delinquencies during recessions. By solely focusing on processing, Mastercard avoids the pitfalls of rising credit delinquencies and consistently keeps its profit margin above 40%.
Third and finally, over 75% of the world's transactions are still conducted in cash. This gives Mastercard a multidecade opportunity to expand its infrastructure into underbanked regions like Africa and the Middle East. It's very possible this emerging market presence can push the company's long-term growth rate to near 10%.
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Wells Fargo
If value stocks are more your thing, money-center bank Wells Fargo (WFC +0.01%) would be an intriguing addition to your portfolio. Wells Fargo is a stock that Berkshire Hathaway has held for more than 30 years.
Bank stocks are going to be mired in molasses for the next couple of quarters. With the Federal Reserve choosing to keep its federal funds rate at a record-tying low, the interest income-earning potential of banks will by stymied. This is just a fancy way of saying that buying bank stocks right now should be done by folks who have a reasonably long investing horizon.
Still, Wells Fargo is dirt cheap. You have to go back to a single week in March 2009 to find the only other time in the past three decades when it's had a lower price-to-book value. Typically, Wells Fargo trades at a healthy premium to its book value because of its long history of generating superior returns on assets.
The reason Wells Fargo is valued so cheaply is that it's still trying to work past a PR scandal that saw 3.5 million unauthorized accounts opened between 2009 and 2016. Yet PR scandals rarely stay fresh in the minds of banking customers.
Investors will appreciate Wells Fargo's lasting ability to attract affluent clientele, as well as its digital push. After all, digital transactions cost just a fraction of in-person transactions.
It could take some time, but Wells Fargo has the ability to double in value.
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Amazon
But if you want growth and value all in one stock, allow me to steer you to Amazon (AMZN +1.10%), a company that one of Buffett's investment lieutenants added back in the first quarter of 2019.
Amazon is, first and foremost, a retail powerhouse. Varying estimates place the company's U.S. online sales market share around 40%, which is many multiples higher than the next-closest competitor. Being the go-to online retailer has allowed Amazon to sign up more than 150 million Prime members worldwide, with the fees collected from these memberships providing a buffer against the company's thin retail margins. Prime members are also more likely to stay within Amazon's ecosystem of products and services, rather than head elsewhere for their consumption needs.
However, it's not retail that's been driving Amazon's operating income up in recent quarters. The company's big-time growth catalyst is its infrastructure cloud-service segment, Amazon Web Services (AWS). AWS provides the building blocks small- and medium-sized businesses need when developing their clouds, which are increasingly important in the post-coronavirus digital world.
The beauty of AWS is that cloud margins are markedly higher than retail and ad-based margins. As Amazon's infrastructure cloud segment becomes a larger percentage of total sales, its operating margins and cash flow should see exponential growth.
Between 2019 and 2023, Wall Street expects Amazon's operating cash flow per share to nearly triple. Based on its current share price, it's valued at roughly 15 times estimated cash flow for full-year 2023. What makes this such an intriguing value is that Amazon has been consistently trading at a multiple of 23 to 37 times cash flow throughout the past decade. If it's simply valued at the midpoint of that range, Amazon's stock could easily double.
