If anyone knows how to invest across different economic cycles, it's Berkshire Hathaway CEO, Warren Buffett. From 1964 to 2021, Buffett has thrived across eight recessions -- delivering investors returns of over 3,600,000%. The secret to his success is simple: Invest in high-quality companies with a margin of safety and hold on to winners as long as they continue delivering results.
This year has been a challenge for investors, but it serves as an excellent reminder to buy companies that can produce regardless of the economy. Here are two stellar Buffett stocks you can buy today and one to avoid for the time being.
Buy American Express because of its strong brand recognition
American Express (AXP 0.07%) is the fifth-largest holding for Berkshire Hathaway, which it has owned since 1993. American Express operates the third-largest credit card network in the U.S., trailing only Visa and Mastercard. American Express makes nearly as much revenue as the two companies combined because it processes transactions as well as issues cards -- something Visa and Mastercard don't do.
What makes American Express appealing to me is the power of its luxury brand. It's done a stellar job of leveraging its brand to appeal to younger generations. In the third quarter, the company added 3.3 million new cards -- with millennials and Gen Zers making up 60% of that growth. The brand also appeals to high-income customers that likely won't be as affected by a slowing economy. This could be crucial, especially if the U.S. enters into a recession in the next couple of years -- which many experts expect at this point.
This year the company has done well, boosted by robust consumer spending on travel and entertainment expenses as economies bounce back from the pandemic and its impacts. Through nine months, American Express' revenue grew 28% while volume on its network is up 24%, and management for the company reaffirmed its guidance through 2023. With its premium brand, high-quality customer base, and strong payments network, American Express is a stellar Buffett stock to buy hand over fist and hold for the long haul.
Buy this "baby Berkshire" before the market recovers
Markel (MKL -1.17%) is a specialty insurance company that writes policies for hard-to-place risks, including small business insurance for specific industries like farms to individual policies on bikes, classic cars, and watercraft. The company is an ideal Buffett stock that is often compared to Berkshire Hathaway because of its sizable investment portfolio.
Insurance companies collect premiums upfront. Because there is a period of time between collected premiums and paying out claims, these companies can invest this cash, also known as "float," however they see fit.
Many insurers choose conservative investments, like U.S. Treasuries or other government bonds. While Markel has some investment in bonds, what sets it apart is one-third of its investment portfolio is in equities, including Berkshire Hathaway, Brookfield Asset Management, Alphabet, and Home Depot. It also has numerous private investments in its Markel Ventures segment, where it owns a controlling interest in companies across industries, including construction machinery, building supplies, and luxury handbags, to name a few.
Markel has done a solid job of running a profitable insurance business, and its investment portfolio puts it in a position to invest at higher interest rates and buy the dip in stocks -- making this a Buffett stock you'll want to buy before the eventual market rebound.
Avoid Citigroup, as it works to turn the business around
One Warren Buffett stock I'm avoiding is Citigroup (C -0.32%). Citigroup's profitability has underperformed its banking peers for years. One measure of profitability in banking is the return on tangible common equity (ROTCE), which measures a bank's profitability on shareholder capital, excluding goodwill, intangible assets, and preferred equity. From 2017 to 2021, Citigroup's average ROTCE is 10.2%, lagging its average peer ratio of 13%.
The bank has been the subject of regulatory scrutiny over the years, too. A couple of years ago, Citigroup was fined $400 million by regulators for "long-standing deficiencies," saying the bank needed to overhaul risk management, data governance, and internal controls companywide. The fine came after the bank failed to address concerns previously identified in 2013 and 2015.
Citigroup also faced critiques from the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), who identified a shortcoming in the bank's "living will." Following the Great Recession, regulations required the largest banks to submit living wills on how they could wind down if an economic shock forced them into bankruptcy. Of the eight banks required to submit a living will, Citigroup was the only one found with a shortcoming.
Citigroup is currently addressing those deficiencies and is working toward making the business more profitable. It is eliminating banking units worldwide, winding down in markets across Asia, Europe, the Middle East, and Mexico. Selling these assets eliminates less profitable units while freeing up capital for other purposes. The stock trades at a bargain at nearly half of its book value -- which is likely why Warren Buffett bought 55 million shares in the bank in the first half of this year.
The cheap valuation isn't enough for me to buy the bank. Earlier this year, the bank told investors that it will look to generate an ROTCE of 11% to 12% over the next three to five years, a disappointing figure that would still put it below its large banking peers. While it is working to address regulatory deficiencies and improve its profitability, that process could take multiple years to achieve -- which is why I'm avoiding this Buffett bank stock for the time being.
