When Berkshire Hathaway (BRK.A -0.36%) (BRK.B -0.33%) CEO Warren Buffett speaks, Wall Street and investors listen intently. That's because the Oracle of Omaha's investing track record is virtually unparalleled.
Since taking the helm of Berkshire Hathaway in 1965, Buffett has led his company to an average annual return of 20%. That may not sound like much nominally, but it works out to an aggregate return of almost 3,400,000%, including the year-to-date gains for the Class A shares (BRK.A).
Buffett's overwhelming success is a function of a number of factors, including his willingness to buy and hold for long periods of time, and his recognition of businesses with sustainable competitive advantages. Keeping in mind that Berkshire Hathaway's portfolio is packed with cyclical businesses that are designed to outperform over the long run, the following three Buffett stocks stand out as having a good chance to make you richer in August, and (most importantly) well beyond.
If history has taught us anything, it's that any downward move in payment facilitator Mastercard (MA -1.99%) is a buying opportunity for patient investors.
Last week, payment processors took it on the chin after Square (SQ -1.57%) announced that it would be acquiring Australian buy now, pay later company Afterpay for $29 billion in an all-stock deal. Square already has two wildly successful operating units with its seller ecosystem, which focuses on helping merchants grow, and Cash App, the company's digital peer-to-peer payments platform.
What Afterpay does is create an internal bridge that'll connect both of Square's ecosystems, as well as expand Square's international appeal. Clearly, this raised some concern with investors that traditional payment processors would face increasing competition.
What the market appears to be overlooking is Mastercard's massive market share and the unlikely proposition that it's going to see its share taken away anytime soon. When it comes to U.S. credit card network purchase volume, as well as global credit card purchase transactions (by value), Mastercard is the clear No. 2, behind Visa. There's absolutely nothing wrong with being No. 2, especially in the U.S., which is the leading country in the world for consumption.
Furthermore, the Mastercard bull case is fueled by the fact that a majority of global transactions are still completed with cash. There looks to be a multi-decade runway for Mastercard and its peers to expand their cashless payment infrastructure to emerging and/or underbanked markets. This should help sustain high single-digit to low double-digit annual sales growth.
Also, take note that Mastercard isn't a lender. Even though some of its peers double-dip by lending and collecting interest income, Mastercard has avoided loaning out money. This becomes advantageous when inevitable recessions and economic contractions arise. Since Mastercard doesn't lend, it isn't required to set aside capital to cover loan delinquencies. As a result, it bounces back faster from recessions than most financial stocks.
Like Mastercard, any dip in the shares of e-commerce giant Amazon (AMZN -1.68%) has historically proven to be a gift for long-term investors.
A little less than two weeks ago, Amazon was punished by Wall Street for announcing that sales growth in the third quarter would slow to between 10% and 16%. This was to be expected after the coronavirus pandemic drove record online purchases over the past 18 months. Nevertheless, it was enough to spook the investment community and push Amazon more than 10% below its all-time high. The good news is that this short-term pain can be your long-term gain.
Warren Buffett's investing lieutenants, Todd Combs and Ted Weschler, clearly value Amazon's dominant role in e-commerce. Based on an April report from eMarketer, Amazon is set to control just over 40% of all U.S. online retail sales in 2021. The next-closest competitor, Walmart, finds itself over 33 percentage points behind Amazon. Being the go-to online retail destination has allowed Amazon to sign up more than 200 million people to a Prime membership worldwide.
What people might be overlooking is that Amazon is also the biggest player by a considerable amount in cloud infrastructure services. Amazon Web Services (AWS) has consistently grown by 30% or more on a year-over-year basis, and it possesses about a third of global cloud infrastructure share, according to a first-quarter report from Canalys. Cloud infrastructure spending is still, arguably, in the early innings.
The most important thing to realize about Amazon is that, even though its retail sales growth may be slowing down, the company's higher-margin operating segments, such as AWS, advertising, and subscription services, aren't slowing one iota. This means record operating cash flow should be the expectation year after year.
A third Buffett stock with the potential to make you a lot richer in August and beyond is (drum roll) Berkshire Hathaway. Even though it's not recognized as a holding in Buffett's portfolio, the Oracle of Omaha and his investing team have bought back tens of billions of dollars' worth of Berkshire Hathaway stock over the past three years.
To state the obvious, buying Berkshire Hathaway stock sort of makes Warren Buffett the investment manager of a portion of your portfolio. While not infallible, Buffett has quite the track record of picking winners. His cost basis for brand-name stocks like Coca-Cola, American Express, and Moody's is $3.245, $8.49, and $10.05, respectively, which implies four-digit percentage gains on all three companies.
Berkshire Hathaway also has clear cyclical ties. Well over 80% of the company's invested assets are tied to information technology, financials, and consumer staples. Warren Buffett wisely recognizes that the U.S. and global economy spend a considerably longer amount of time expanding than they do in recession. This means if he and his team simply hold onto winning stocks over the long run, those companies will be able to take advantage of these disproportionately long periods of economic expansion.
Dividend stocks are another source of success for Berkshire Hathaway. This year, the company is on pace to net north of $4.3 billion in dividend income, plus another $800 million from its preferred stock investment in Occidental Petroleum. Based on Berkshire Hathaway's portfolio cost basis, we're talking about an almost 5% all-in yield.
Although a 20% average annual return could be difficult to duplicate moving forward, significant wealth creation has seemingly always been in the cards for long-term shareholders of Berkshire Hathaway.