Warren Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A -0.31%) (BRK.B -0.14%), is known as one of the world's greatest investors. His investment philosophy and strategies are studied, his comments can move markets, and his portfolio has outperformed the benchmarks for decades.
While most of his decisions are good ones, not all are winners and Buffett is not afraid to make changes when necessary. But he is also very deliberate in his investment decisions, and many of his holdings have been fixtures in his portfolio for decades.
Here are two stocks that he loves -- judging by how long he has held them and the size of his positions. Are they right for you?
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1. Moody's
Buffett added Moody's (MCO 0.54%) to his portfolio in 2000, and it is not only one of his longest-held positions; it is also his sixth-largest and one of the best performers. The credit rating agency checks off several of the boxes Buffett and his team look for in a stock, most notably its distinct competitive advantage. Moody's is the largest credit rating agency in the country -- sharing a 40% market share with S&P Global.
There is one other player, Fitch Ratings, with a 15% share, and then that's pretty much the market. And it's not likely that Moody's will see more competition anytime soon, as only a few credit rating agencies are necessary (otherwise, the ratings would get watered down). Plus, Moody's has a huge brand, and there are fairly significant regulatory hurdles to navigate for would-be competitors.
Moody's also has a rapidly growing data and analytics business, which generated about $2.4 billion in revenue last year, or 38% of total revenue. This business helps to smooth out earnings when debt issuance is low, as is the case right now. In the first quarter, we observed that balance as the credit rating business saw revenue plunge 20% on lower debt issuance while the analytics business saw revenue increase 23% year over year. With Moody's reducing its outlook for debt issuance for 2022 on recession fears, the company expects revenue declines in the low double-digit percentages from that business in 2022 but revenue increases in the high teens for analytics, leading to largely flat revenue for the year.
These two businesses, which operate differently in different market cycles, are another reason that this is such a good all-weather stock. It is a big reason why Moody's stock has returned 22% annually, on average, over the past 10 years as of May 16, and why it is one of Buffett's best performers.
2. US Bancorp
US Bancorp (USB 0.35%), the bank holding company for US Bank, is Buffett's 10th-largest holding and one that has been part of his portfolio for 16 years. Buffett has always loved bank stocks in general, although he has pared back his holdings since the pandemic. Still, they are among the most represented industries in his portfolio. They are stable, durable businesses that will always be around and that are essential to the growth of other businesses -- and the economy.
As for US Bancorp, it is the fifth-largest bank in the country and one of the most efficient, with a return on equity of 12.87% at the end of the first quarter, the highest of its large bank peers. Last year, it expanded its geographic footprint, acquiring MUFG Union Bank, which is expected to add 6% to earnings per share in 2023 and 8% when it's fully integrated in 2024. Further, US Bancorp anticipates saving $900 million from the deal through real estate consolidation, technology and systems conversion, and other efficiencies.
The major catalyst over the next year or two is rising interest rates. US Bancorp revised its guidance based on rising interest rate projections and now anticipates net revenue to increase 5% to 6% this year over 2021 levels -- with some 65% coming from interest rates and 35% from loan growth. As it derives a larger percentage of its income from traditional banking than its large bank rivals, which have more significant investment banking and trading operations, US Bancorp should outperform during this cycle, as it largely has year-to-date.
The fact that these are two of Buffett's 10 largest holdings and two of his longest-held stocks speaks for itself. They are two sturdy companies with key competitive advantages, operational strengths, and growth catalysts. Whether or not they are right for your portfolio depends on a lot of factors. If you are looking for a reliable value stock that should outperform the market in this period of rising interest rates, US Bancorp is a great option. If you are looking for a growth stock that has delivered over the long term and has competitive advantages that few other stocks can boast, then Moody's would be a good fit.
