When it comes to the markets, March definitely has roared in like a lion, or perhaps a bear (although we're not in actual bear market territory yet). An economy challenged by inflation and a market preparing for interest rate hikes have been made worse by Russia's invasion of Ukraine and the turmoil and uncertainty that has caused.
In uncertain times, it's hard to know where to turn, but a good place to start might be with one of the world's greatest investors, Warren Buffett, founder and CEO of Berkshire Hathaway. A look at where Buffett and Berkshire are investing their money could prove illuminating for many investors. Here are two Buffett stocks in particular that are built for these times.
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1. American Express
While he has pared back his holdings in recent years, stocks from the financial sector still make up a significant portion of Berkshire's portfolio. In fact, five of the 10 largest holdings in Berkshire Hathaway's investment portfolio are financial stocks. The third-largest as of Dec. 31, with about 7.5% of his assets, is American Express (AXP -0.74%). It is also one of Buffett's longest-held stocks -- he's owned it since 1993.
The credit card company has been one of the top performers for Buffett, and its stock is trading up about 6% year to date. There are a few reasons why it is a good buy right now.
First, American Express is coming off a strong fourth quarter where it had a 30% revenue gain and 20% net income increase year over year and remains attractively valued. Its price-to-earnings ratio (P/E) is about 17, which is lower than its peers. It has been in this range since July.
Second, rising interest rates should be a tailwind for American Express as it generates additional interest income from its loans. Third, a recovering economy and the end of COVID-19 mask mandates should result in an uptick in travel and entertainment spending, which makes up a significant part of American Express's revenue. While inflation and protracted war in Ukraine could impact that, American Express's higher-income clientele may be less impacted than its credit-card competitors. The company expects to see 18% to 20% growth in revenue in 2022.
2. Bank of America
Bank of America (BAC 1.00%) is the nation's second-largest bank with about $2.5 trillion in assets under management as of Dec. 31. It is also Buffett's second-largest holding, representing about 13.6% of his portfolio as of Dec. 31. The stock price is down about 5% year to date, but there are some catalysts and factors that should allow it to move higher in 2022 and beyond.
Bank of America is coming off a good Q4 in which revenue was up 10%, net income was up 27%, deposits were up 16%, and loan balances were up 6% year over year. Further, Bank of America added 901,000 net new checking accounts and 525,000 net new investment accounts, up 64% and 24%, respectively, over pre-pandemic 2019 levels. Also, its efficiency ratio, the percentage of expenses it takes to earn $1 of revenue, is 66%, down from 68% in Q4 2020.
This momentum should continue in 2021 as Bank of America has two things going for it -- loan growth and higher interest rates. Coming out of the pandemic, bank officials expect loan growth to accelerate in 2022 with a high-single-digit percentage increase. An increase in net interest income should follow. On the Q4 earnings call, CEO Brian Moynihan projected a revenue jump of about $6.5 billion with a 100-basis-point increase in rates, which would bring interest rates to 1%.
The expectation is that the Federal Reserve will increase rates four times in 2022, starting in March. And while expenses increased 6% to $14.7 billion in the last quarter, officials anticipate expenses to be flat due to technology and efficiency improvements made last year.
Buffett has one-fifth of Berkshire's stock portfolio invested in these two companies, and that's no coincidence. Both are positioned to be solid performers in a very uncertain 2022.
