You'd struggle to find an investor with a better long-term track record than Berkshire Hathaway (BRK.A 0.53%) (BRK.B 0.50%) CEO Warren Buffett. Since 1965, Berkshire's share price has grown by a 20.3% annual rate, equating to an aggregate gain of 2,744,062%. That's more than a 2,700,000% outperformance of the benchmark S&P 500.
What's remarkable about Buffett's outperformance is that he isn't doing anything other investors couldn't themselves do. The Oracle of Omaha's not-so-secret formula for success has involved buying and holding brand-name companies with clear-cut sustainable competitive advantages.
While not all of Buffett's selections have been winners, the vast majority will end up in the profit column. In 2021, five Buffett stocks stand out as being particularly attractive and should be bought hand over fist by investors.
When in doubt, pound the table on the third-largest publicly traded company in the U.S., Amazon (AMZN 1.29%). Despite its $1.63 trillion market cap, Amazon is still very much a growth stock, and it has plenty of upside to come.
As most folks know, Amazon is the market share leader in U.S. online sales. Estimates vary from source to source, but it's believed that Amazon controls anywhere from 38% to 44% of U.S. e-commerce and is, at minimum, 30 or more percentage points higher than every other online competitor. Although retail margins tend to be razor-thin, the company has been able to use its e-commerce popularity to encourage shoppers to purchase more than 150 million Prime memberships worldwide. Given the push online associated with the coronavirus pandemic, it would not be surprising if Amazon surpassed 200 million Prime memberships in the fourth quarter.
Even more important to Amazon's growth thesis is cloud infrastructure segment Amazon Web Services (AWS). AWS has grown sales by 29% from the prior-year period in each of the last two quarters and is on pace for $46 billion in annual run-rate revenue. The margins associated with cloud services are considerably higher than retail, which means that as AWS grows into a larger percentage of total sales, Amazon's operating cash flow will skyrocket.
Just because Warren Buffett has been reducing his stake in money-center bank Wells Fargo (WFC -0.61%) doesn't mean you should do the same. If you have a long-term investing horizon, scooping up shares of Wells Fargo could net you quite the bargain.
The gray cloud overhanging Wells Fargo has to do with a scandal in which it opened 3.5 million unauthorized accounts between 2009 and 2016 as part of an aggressive branch-level cross-selling campaign. The company has since taken its PR lumps and settled with the Justice Department. If history has taught us anything, it's that consumers have a very short-term memory when it comes to big banks making mistakes.
Wells Fargo stands out for its ability to attract well-to-do clientele. Affluent customers are less likely to change their spending habits during economic fluctuations and more likely to keep paying their bills. Wells Fargo's superior return on assets reflects its ability to lure wealthy clients.
Though it's rebounded a bit since late October, Wells Fargo is still trading well below its book value. This suggests that patience will pay off for long-term investors.
Another Buffett stock to buy hand over fist is a company that the Oracle of Omaha isn't responsible for adding to Berkshire's portfolio: Barrick Gold (GOLD -0.65%). Buffett has never been a big fan of physical gold, but the conditions are ripe for it and underlying miners to thrive.
The outlook for physical gold has never been more lustrous. Income seekers are struggling to find inflation-topping yields, and the Federal Reserve's pledge to keep its fed funds rate at or near a historical low isn't going to help. With few avenues to protect wealth, conservative investors are going to choose gold as the most logical store of value. It also doesn't hurt that gold tends to wildly outperform in the early stages of an economic recovery.
As for Barrick Gold, it should be capable of record cash flow in 2021, and will almost certainly use that cash flow to further reduce its outstanding debt. Net debt in the third quarter was lowered by roughly $1 billion from the sequential second quarter to $417 million. The company looks on track to hit a net-cash position in 2021, which could fuel reinvestment in existing mines and a more robust capital return program.
Teva Pharmaceutical Industries
For you deep-discount value stock investors, brand-name and generic-drug developer Teva Pharmaceutical Industries (TEVA -3.22%) should be on your buy list.
Without beating around the bush, Teva's past couple of years haven't been pretty. The company has been hit with multiple lawsuits relating to opioids and generic price-fixing. Teva's previous management team also buried the company in debt following its Actavis acquisition. Thankfully, turnaround specialist CEO Kare Schultz has made incredible headway since taking over in November 2017.
Under Schultz's leadership, Teva has reduced its annual operating expenditures by approximately $3 billion, and the company's net debt has been slashed by more than $10 billion to sub-$24 billion. A combination of selling non-core assets and using operating cash flow to reduce debt could lower the company's net debt to $15 billion by 2023.
Also, don't forget that Teva benefits from an aging population. Brand-name drug list prices keep climbing, virtually ensuring a dominant future for cheaper generic drugs.
If Schultz can settle one or more of Teva's outstanding lawsuits in 2021, the stock could easily double.
The final Buffett stock to buy hand over fist in 2021 is none other than... Buffett's own company, Berkshire Hathaway. Since mid-2018, Buffett and his right-hand man Charlie Munger have authorized the repurchase of approximately $22 billion worth of Berkshire Hathaway stock. If they see value, you should, too.
The beauty of Berkshire's investment portfolio is that it's set up to take advantage of multiyear U.S. and global economic expansions. More than 90% of Berkshire's invested assets are in information technology, consumer staples, and financials, all of which are cyclical sectors. Buffett's investing success is simply a bet on U.S. and global growth expanding over time.
In particular, the Oracle of Omaha's love for financial stocks should bear fruit in the coming years. When the Federal Reserve does begin raising the federal funds rate by 2024, the bank stocks Berkshire owns will see a sizable uptick in interest income.
Furthermore, Berkshire Hathaway is currently valued at 31% above its book value. That's at the lower end of its valuation premium over the past eight years.
Buffett's company has a history of delivering for its shareholders, and 2021 shouldn't be any different.