Warren Buffett is undoubtedly one of the most successful investors in history. With a fortune exceeding $100 billion, he currently ranks fifth on the Bloomberg Billionaires Index. For that reason, many investors track Buffett's portfolio by monitoring the Forms 13F Berkshire Hathaway (BRK.A 0.61%) (BRK.B 0.76%) files with the Securities and Exchange Commission. But those quarterly filings omit certain information.
In 1998, Berkshire acquired reinsurance company General Re, including its subsidiary New England Asset Management (NEAM), which has an investment portfolio worth $5.9 billion. The stocks held in that portfolio will not appear in Berkshire's 13F filings, but Buffett (through Berkshire) ultimately owns NEAM's invested assets, which means he has a "secret portfolio."
Here are two top stocks in Buffett's secret portfolio to buy now and hold forever.
1. Microsoft: The best software company in the world
Microsoft (MSFT -0.67%) reported underwhelming financial results in the second quarter of fiscal 2023 (ended Dec. 31). Revenue rose just 2% to $52.7 billion and non-GAAP net income fell 6% to $2.32 per diluted share. But investors need to put those numbers in context. Businesses are spending money more cautiously amid the inflationary environment, and the strong U.S. dollar led to unfavorable foreign exchange rates. Both situations were material headwinds for Microsoft. In fact, second-quarter revenue increased 7% in constant-currency terms, and non-GAAP earnings rose 2%.
However, those headwinds are unrelated to the underlying business, so they have no bearing on the long-term investment thesis. Microsoft ranked as the best global software seller last year, according to research company G2, reflecting high user satisfaction scores and a strong presence across several markets. Of course, Microsoft 365 is the gold standard in office productivity software, but industry analysts have also recognized Microsoft as a leader in communications, enterprise resource planning, and cybersecurity.
Additionally, Microsoft Azure is gaining market share in cloud computing. It accounted for 23% of cloud infrastructure and platform services (CIPS) spending in the most recent quarter, up from an average of 21% over the past year. That puts Azure firmly in second place behind Amazon Web Services. Microsoft is driving that momentum through expertise in hybrid computing, developer tools, and artificial intelligence, and its partnership with OpenAI could be a key growth driver in the coming years.
In a nutshell, Microsoft provides a broad number of mission-critical software products and cloud services, and that puts the company in front of a large market opportunity. Cloud computing spending alone is expected to grow at 16% annually to reach $1.6 trillion by 2030, but the cybersecurity, enterprise resource planning, and communications software markets are also expected to grow at a double-digit pace through the end of the decade.
With that in mind, shares of Microsoft currently trade at 9.6 times sales, a reasonable price given its growth opportunities. That's why this growth stock is worth buying today.
2. PayPal: The leader in online payment processing
PayPal Holdings (PYPL -0.06%) started last year on the wrong foot. Economic headwinds led the company to withdraw its medium-term financial targets, including its goal of reaching 750 million active accounts by 2025. But management responded quickly, cutting costs and refocusing investments in checkout and digital wallets (i.e. areas where PayPal has a significant competitive advantage), and the benefits of that decisive action were evident in its latest financial report.
Fourth-quarter revenue rose 7% year over year to $7.3 billion, representing 9% growth in constant-currency terms, and non-GAAP earnings increased 11% to $1.24 per diluted share. Better yet, that momentum should accelerate this year. Management plans to cut nearly $2 billion in operating expenses, which should lead to 18% non-GAAP earnings growth in 2023.
More broadly, PayPal is well positioned to maintain that trajectory for many years to come. It operates one of the largest payments networks in the world, with 435 million active accounts, and the two-sided nature of that network affords the company a significant advantage. While most payment providers work only with merchants, PayPal provides financial services to merchants and consumers, meaning it has built trust (and collected data) from both sides of the transaction. That gives the company a significant advantage.
Specifically, PayPal has a deep understanding of consumer spending habits, which makes it very good a preventing fraud. In fact, PayPal has both the highest acceptance rate and the lowest loss rate in the industry, according to CEO Dan Schulman. Additionally, its trusted brand actually increases conversion rates for businesses. That compelling value proposition helped PayPal become the most accepted digital wallet in North America and Europe.
Going forward, PayPal should benefit from several tailwinds. Ark Invest says the number of digital wallet users will increase 75% by the end of the decade to reach 5.6 billion, and digital wallets are expected to take share in e-commerce and physical retail. PayPal holds 42% market share in online payment processing, meaning it is already well positioned to benefit from growth in e-commerce, but it recently formed a partnership with Apple that could help it gain momentum in physical retail. U.S. consumers will soon be able to use PayPal- and Venmo-branded cards anywhere Apple Pay is accepted, and Apple Pay is the most popular in-store mobile wallet in the U.S.
Shares currently trade at 3.4 times sales, a bargain compared to the three-year average of 9 times sales. That's why this fintech stock is a buy.
