The stock market is now clawing back some of the ground it lost in the previous months. Major U.S. indices such as Dow Jones Industrial Average, the Nasdaq Composite, and S&P 500 gained 5.9%, 7.5%, and 6.6%, respectively, in the last month.
Despite the current bull rally, the global economy is still battling a host of challenges including rising inflation, increasing interest rates, slowing growth, and a banking crisis. Goldman Sachs is now projecting a 35% probability of recession in the U.S. by March 2024 -- up from its previous projection of 25%.
Amidst this economic uncertainty, it makes sense for retail investors to pick only high-quality stocks with compelling long-term opportunities. One place to find such stocks is by mimicking Warren Buffett's investment strategy and checking his Berkshire Hathaway portfolio. Here's why two of his picks -- Snowflake (SNOW 3.69%) and American Express (AXP -0.62%) -- seem to be attractive this month.
1. Snowflake
My first Buffett stock for April is the leading cloud-native data warehousing company Snowflake. The company's cloud data platform helps enterprises break data silos and enables them to integrate and form a single unified view of data. The company also offers services to analyze and securely share data with partners.
Berkshire Hathaway invested $735 million in the company in September 2020. Although Snowflake's share price tumbled in response to a weak 2024 revenue outlook due to a slowdown in corporate spending, there are several factors working in its favor.
First, the company's data platform is cloud-provider agnostic. Hence, it works seamlessly with Amazon Web Services, Alphabet's Google Cloud, and Microsoft's Azure.
Second, the company has adopted consumption-based pricing, referred to as the "warehouse as a service" model. Since the company charges businesses only for the services they use, it could lead to top-line volatility in the short run. But this model also offers higher flexibility to customers, thereby reducing churn levels.
Third, the platform separates storage and computation services, thereby allowing enterprises to scale any resource they need without significant business disruptions and downtime.
Lastly, the company has created a data exchange that enables enterprises to share or monetize organizational data. With access to data from other organizations, enterprises can derive more-accurate insights for data-driven decision-making. Subsequently, Snowflake's cloud platform benefits significantly from the network effect, as more users help increase the scope and reach of the data available on the data exchange, which in turn attracts even more customers.
While the long-term picture is rosy, a slowdown in bookings due to reduced corporate spending can prove to be a challenge for the company in the short run.
Snowflake's share price is currently down by around 36% from its 52-week highs. Shares of this high-growth stock can tumble even more amid market uncertainty. However, this does not change the fact that this emerging leader is positioned to benefit from rapid expansion in the global data warehouse-as-a-service market, estimated to grow annually at a compounded average growth rate (CAGR) of 23% to $27.1 billion by 2030.
It makes sense for retail investors to start picking up a small stake in this top-quality stock in April 2023 (when prices have fallen significantly from their peak levels) and gradually build a bigger position over the course of the next few months.
2. American Express
My second Buffett stock for this month is the financial services and travel company American Express. Berkshire Hathaway had a $22 billion stake in this company at the end of 2022.
Unlike other prominent financial services players such as Visa, Mastercard, JPMorgan Chase, and Bank of America, which focus on a single part of the digital payments business, American Express operates a closed-loop network.
That means the company is a merchant acquirer, a multinational credit card provider, and operates its own payment network. It has multiple revenue streams including assessment fees by the payment network that facilitates transactions, interest income and membership fees from cardholders, and interchange fees charged to merchants for getting access to card payments (to cover handling expenses and charges associated with fraud and bad debt).
Besides a diversified revenue base, American Express focuses on affluent, high-spending clients (its cardholders spend an average of three times more than other cardholders), which means more card fees for the company.
This has also made the overall business relatively resilient to the current consumer slowdown. The company charges premium fees to merchants for access to these high-spending clients on its network. And the company benefits from rising inflation since it translates into higher spending on its payment network.
American Express had 133.3 million active cardholders at end of 2022. And 99% of the U.S. merchants that accept credit cards also accept the company's cards.
Thanks to the broad reach among customers and merchants, American Express posted solid numbers in 2022. Revenue was up 25% year over year to $52.9 billion, while network payment volume rose 21% year over year to $1.6 billion in 2022. While net income was down 7% year over year to $7.5 billion in 2022, it was mainly due to changes in reserves in 2021 and 2022.
The stock is currently trading at 16.1 times trailing 12-month earnings, which is significantly lower than its average five-year price-to-earnings multiple of 19.9. Considering the company's solid business model, robust financials, and attractive valuation, I believe American Express is an attractive pick now.
