The news on Wall Street has been anything but inspiring lately, with dropping share prices and many companies slashing forecasts. Just last week, big-box retailer Target updated its inventory situation and cut its operating margin forecast, a week after Microsoft scaled back its second-quarter expectations.
There are two ways to approach this scenario: Feeling depressed as you watch your portfolio shrink, or delighting in the potential to snag great stocks on sale.
In any stock market, there are great opportunities, and one guru at identifying opportunities is Warren Buffett. Taking a page from his investing model, American Express (AXP 1.26%) and StoneCo (STNE 1.48%) look like two great stocks to buy right now.
1. American Express: In tip-top shape for whatever the economy throws at us next
The economy has been unpredictable over the past few years. Some companies are trying to keep their heads above water until the waves subside, but others are thriving despite the pressure.
American Express was hit with declines, like every other credit card company, in the early stages of the pandemic. But it's expanded its business to encompass a wider variety of services, and it's targeting a new, younger population of affluent Americans, both of which give it some resilience and are a source of high growth. Despite the inflation and rising costs that are plaguing top companies across the globe, American Express has been enjoying robust sales increases that it expects to continue throughout the year.
American Express benefits from its focus on an upscale clientele that has more spending power than the average shopper. In recent years, it has been able to shift that focus to a younger generation of affluent shoppers, attracting a record number of cardholders with perks geared toward this new cohort. These consumers are more resistant to inflation; after a long period of lockdown and restrictions, they have resumed going out to dinner and are traveling again -- the company's traditional bread and butter.
After gains for most of 2022, American Express stock is now down about 5% for the year (at least it was before Monday's selloff). However, it's still outperforming the broader market.
Buffett's Berkshire Hathaway is the single-largest shareholder, with a 20% stake in the company. As inflation accelerates and Americans feel the heat, American Express is expecting its core customers to keep spending, and it's likely to outdo the broader market in the second quarter.
2. StoneCo: Fabulous growth as it pulls itself together
StoneCo had a difficult 2021, and that showed up in an 80% stock loss for the year. It hasn't gotten any better this year, and StoneCo stock is down more than 50% year to date.
Harsh investor sentiment isn't without reason. The Buffett-backed company, which provides fintech services for small businesses in Brazil, made some missteps last year. Between expanding too quickly without accounting for profitability and not passing cost increases on to customers in an effort to keep prices low, losses ballooned even as sales increased.
The company accounted for its foibles and took strong measures to right its ship. There is so much to work with here that with the correct strategy, it shouldn't be impossible to get back on track, and it looks like management is heading in that direction.
StoneCo is already making strides, and it posted positive earnings results for the first quarter. Revenue increased nearly 140% to 2.1 billion Brazilian reals, or just over $400 million. It's also making progress on profitability, with adjusted pretax income increasing from 17 million reals last year to 163 million reals this year, or about $32 million. It changed its pricing structure and successfully passed on some of its increased costs to clients. It also changed its reporting format to break out two distinct segments, financial services and software, for a stricter focus.
StoneCo has huge potential, adding thousands of new customers quarterly in its home market of Brazil, as well as the possible expansion into new territory and new technology. Investors were impressed with the progress in the first quarter, reported at the beginning of the month, and the stock is up 14% over the past month. Shares are trading at a forward one-year price-to-earnings ratio of 27 and a price-to-sales ratio of only three. Those are cheap multiples for a high-growth company, and it's not hard to see why Buffett thinks this stock may be undervalued.
