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3 Warren Buffett Stocks Worth Buying Now

By Jason Hawthorne - May 3, 2021 at 11:15AM

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His best performers may not fit his traditional criteria.

Warren Buffett has been a pretty good investor, to put it mildly, since taking over Berkshire Hathaway (BRK.A 0.07%)(BRK.B 0.04%) when it was a struggling textile maker, in 1965. And the list of stocks he owns is a great place to begin searching for investments today. Three of those holdings stand out as excellent opportunities right now.

Apple (AAPL 0.00%), U.S. Bancorp (USB -0.57%), and Snowflake (SNOW -2.23%) represent different segments of the economy and employ notably different business models. However, they each have characteristics that could produce market-beating returns for shareholders in the years to come.

Warren Buffet, Chairman and CEO of Berkshire Hathaway.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

1. Apple

Apple's rebirth in the early 2000s with the iMac and iPod was a market changer. The iPhone virtually transformed society in the 2010s. Now, its ability to leverage the iOS platform across those devices to sell high-margin services has made it the largest company in the world. Its current market capitalization is about $2.2 trillion. 

Most thought Buffett was too late when he purchased the stock in 2016, but shares are up about 400% since then and have gained nearly $100 million for Berkshire Hathaway. It's still not too late to buy shares. In its just reported second quarter covering the three months ending March 27, Apple put up incredible numbers. Revenue was a record $89.6 billion, up 54% from the same quarter last year. Management raised the dividend 7%, and the makeup of services continued to push margins higher.

Period Services Revenue Services as Percent of Revenue Services Gross Margin
Q1 & Q2 2021 $32.7 billion 16.2% 69.3%
2020 $53.8 billion 19.6% 66%
2019 $46.3 billion 17.8% 63.7%
2018 $39.8 billion 15% 60.8%

Data source: Apple.

Apple has proved two things over time: It can be a fast follower in new trends, and it can integrate those new offerings into its iOS operating system in a way that customers naturally adopt them. As society changes over the next several decades, management will make sure it has an offering that "just works better" for users. That could be an iCar, an autonomous taxi service, or something no one has dreamed up yet. The proof is in the numbers. Apple now has twice the number of paid subscriptions for its services as it did just 2.5 years ago. With so much of our lives now tied to our mobile devices, the installed base and proven approach make Apple stock a buy and hold for anyone thinking long term.

2. U.S. Bancorp

U.S. Bancorp is the prototypical Buffett holding. Even for a bank, the Minneapolis-based company is a steady, conservative operation. The fifth largest bank in the U.S. isn't as well known as its counterparts, probably because it's a regional operation. Unlike the Wall Street titans, regional banks make most of their money from traditional lending for mortgages and small business, as well as interest on deposits. The recovery from the pandemic has bolstered these lines of business and benefited the stocks. The S&P Regional Banking ETF (KRE -0.15%) is up 94% in the past year, compared with 68% for the broader Financial Select Sector SPDR ETF (XLF -0.34%). U.S. Bancorp can make a claim as the best run of the regional banks, consistently delivering a better return on equity than its peers. The only exception is SVB Financial, which has benefited from its focus on venture capital, start-ups, and private equity in the past few years.

Regional Bank Market Cap Avg. Return on Equity 2016-2020
U.S. Bank $88.9 billion 13.4%
Truist Financial $79.7 billion 8.4%
PNC Financial $79.5 billion 10.8%
First Republic $31.9 billion 11%
SVB Financial $31.1 billion 16.4%
Fifth Third Bank $28.9 billion 11.7%

Data source: Morningstar.

Despite the power the media ascribes to the Federal Reserve in keeping rates low, the market is expected to continue pushing rates higher as the economy recovers. That's good news for banks that make their money on interest and lending. At just 12.7 times analysts' earnings estimates for this year and a 2.8% dividend yield, now may be a great time to add shares of U.S. Bank to a portfolio.

3. Snowflake

It was almost certainly one of Buffett's lieutenants who purchased Snowflake, the provider of data cloud services. The combination of technology and valuation definitely doesn't fit his pattern, and the stock is often criticized for being priced to perfection. But that's exactly what the business has been delivering. The combination of adding customers, increasing spending among those customers, and the lack of a subscription model makes traditional valuation metrics somewhat deceptive.

Many will look at the price-to-sales ratio of 105 for Snowflake and conclude that it's far far too high, even for a company that just grew sales 116% year over year. Like most cloud businesses, revenue is recognized over the duration of a contract, not when the company makes a sale. That makes remaining performance obligations (RPO) a critical metric. It actually shows investors the amount of business the company has won. For Snowflake, RPO was up 213% year over year for its fiscal 2021 that ended Jan. 31. That means the company grew almost twice as fast as it might first appear. 

That disconnect makes more sense when digging into what customers are spending with the company. Again, the traditional metric of customer count hides the true momentum of the business. Both the number of customers spending more than $1 million per year and net revenue retention (NRR) outpaced customer growth.

That last metric is best explained by an example. For the most recent fiscal year, the 168% NRR means customers from February 2019 spent almost $1.70 between February 2020 and January 2021 for every $1 they spent between February 2019 and January 2020. The bottom line is that existing customers are paying Snowflake more and more over time.

Fiscal Year (Ending Jan. 31) Customer Growth Growth of Customers Spending >$1 million Net Revenue Retention Remaining Performance Obligation Growth
2021 73% 88% 168% 213%
2020 152% 193% 169% 233%

Data source: Snowflake.

These nontraditional metrics make it clear that Snowflake is growing at an astronomical rate and customer spend is barely slowing down. With its massive data cloud, Snowflake could seamlessly layer in services like security and analytics in the future to fuel even more gains in per customer spend. High-growth stocks are much more prone to volatility, so buying shares isn't for the faint of heart. That said, this unconventional holding could end up being one of Buffett's best performers over the next few years. 

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (0.00%) $0.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$417,700.00 (0.07%) $298.56
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.40 (0.04%) $0.12
U.S. Bancorp Stock Quote
U.S. Bancorp
USB
$47.25 (-0.57%) $0.27
The PNC Financial Services Group, Inc. Stock Quote
The PNC Financial Services Group, Inc.
PNC
$161.45 (-0.85%) $-1.39
Truist Financial Corporation Stock Quote
Truist Financial Corporation
TFC
$48.57 (-1.32%) $0.65
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund
XLF
$32.23 (-0.34%) $0.11
SPDR Series Trust - SPDR S&P Regional Banking ETF Stock Quote
SPDR Series Trust - SPDR S&P Regional Banking ETF
KRE
$59.46 (-0.15%) $0.09
Fifth Third Bancorp Stock Quote
Fifth Third Bancorp
FITB
$34.87 (-0.99%) $0.35
First Republic Bank Stock Quote
First Republic Bank
FRC
$147.27 (0.24%) $0.36
SVB Financial Group Stock Quote
SVB Financial Group
SIVB
$412.28 (-0.78%) $-3.24
Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$148.15 (-2.23%) $-3.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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