Berkshire Hathaway's (BRK.A 1.18%) (BRK.B 1.30%) CEO Warren Buffett is one of the best investors of our lifetime. Buffett stands out, in part, because he doesn't tend to follow the crowd, doesn't fear market crashes, and has a knack for putting his cash to work when everyone else is fearful.
Buffett has explained that he looks to buy quality companies with management teams he likes and that he buys with the intention of holding on to these investments for years or even decades. Let's take a look at four stocks Buffett likes and see if we can glean what he likes about them. Berkshire's holding in these four stocks totals $71 billion, or nearly 21% of the holding company's total portfolio.
Image source: The Motley Fool.
1. Bank of America: $34.7 billion invested
Bank of America (BAC 3.35%) is the second-largest bank in the U.S., with $2 trillion in deposits -- trailing only JPMorgan Chase. It's also Buffett's second-largest holding, making up 10% of Berkshire Hathaway's portfolio. Buffett has long been a fan of financial stocks, including banks, insurance companies, and payment processors, which benefit when the economy expands.
What makes Bank of America intriguing is its sensitivity to changes in interest rates. This year, the Federal Reserve has been trying to stifle inflation using its primary tool -- interest rate adjustments. Since March, the Fed has quickly raised rates from 0.25% to 2.5%.
Bank of America has reaped the benefits, seeing its net interest income (NII) increase 18% year over year through the first six months of the year. Another 100-basis-point increase in interest rates would add $5 billion to its NII over the next year.
2. Moody's: $7.3 billion invested
Moody's (MCO 0.02%) provides credit ratings to companies across the globe, making it a crucial player in the fixed-income market.
Moody's has a strong competitive advantage for a couple of reasons. One, regulations in the credit rating business make it difficult for new entrants to enter the space. And two, companies want to turn to a rating agency with an established reputation. As a result, Moody's and S&P Global dominate the industry, each claiming about 40% of the market.
Moody's has benefited from an era of low interest rates, which encouraged companies to issue debt continuously. With interest rates rising, Moody's will lean more on the other side of its business -- analytics. In this segment, Moody's helps companies navigate uncertain credit markets, supply chain issues, and a transition to cleaner energy.
So while Moody's rating business saw revenue decline 24% so far in 2022, analytics picked up some slack as revenue increased by 20%, a positive sign that Moody's business could be resilient in the face of higher rates.
3. U.S. Bancorp: $6.3 billion invested
U.S. Bancorp (USB 2.56%) provides banking services across 2,200 branches and is the fifth-largest bank in the U.S., with over $530 billion in assets under management.
U.S. Bancorp differs from other banks because it focuses purely on traditional banking activities: making loans and growing deposits. The bank is highly selective when making loans, concentrating on high-quality borrowers. As a result, U.S. Bancorp's return on equity (ROE) has outpaced its banking peers over the past decade.
Like Bank of America, U.S. Bancorp is quite sensitive to changes in interest rates. In the first half of the year, the bank's NII has increased 6.6%, and another 50 basis point increase in interest rates would help NII grow another 1.2% over the next year.
4. American Express: $23 billion invested
American Express (AXP 6.22%) is Buffett's fifth-largest holding, which he has held for over 29 years. Buffett likes payments processors, which is why he also holds shares in Visa and Mastercard, although they make up a much smaller portion of the portfolio.
American Express's business has held up well this year, with its total revenue in the first half of this year increasing by 20%. American Express generates revenue from payment processing fees and makes money on interest income and fees as a lender. Higher rates have helped it generate 25% growth in NII in the first half of this year.
The company's affluent customer base can help it deal with economic downturns better than other payment companies, and its strong brand is one reason why Buffett has held on to this company for so long.
