Warren Buffett, one of the most successful investors in history, earned a remarkable 3,641,613% total return on capital for Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) shareholders from 1964 to 2021. By contrast, the benchmark S&P 500 produced total returns on capital of approximately 2,600% over this period.
What is Buffett's secret to beating the broader markets? He mainly invests in companies that have a strong competitive advantage and a high intrinsic value.
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Here are two top Buffett stocks that look like outstanding buys right now.
Amazon: A dominant force in e-commerce and cloud computing
Berkshire has been a long-term investor in e-commerce and technology giant Amazon (AMZN 3.43%). It started buying Amazon stock in the first quarter of 2019, acquiring 483,300 shares worth $860.6 million at the time.
Since then, Berkshire's share count has grown to 10,551,000, valued at roughly $1.34 billion as of today. Amazon has attracted value investors like Berkshire with its multiple revenue streams, innovative growth strategy, massive scale, and strong competitive advantage.
Amazon is more than just an online retailer. It also dominates in cloud computing, artificial intelligence, digital advertising, streaming media, and smart devices. These segments are also integrated within the company, creating synergies and efficiencies.
These diverse businesses provide Amazon with multiple sources of reliable revenue and tremendous earnings potential. And the company's cutting-edge solutions that integrate these businesses create a wide moat that keeps competitors at bay.
Amazon also has millions of loyal Prime members, a vast distribution network, and a culture of innovation. These factors have made the company one of the most profitable in the world. In 2022, revenue increased by 9% to a staggering $514 billion. And its operating cash flow reached $46.8 billion for the year.
Most analysts covering the stock believe that it is undervalued right now. For example, Morningstar's Dan Romanoff estimates that its shares are trading at a 7.1% discount to their fair value.
Romanoff's opinion seems to be well supported. Amazon is projected to grow its top line by at least 20.7% in 2023 and 2024. And its enormous scale, loyal customer base, and first-class innovation engine should sustain its earnings power for the foreseeable future.
Bottom line: Amazon screens as a top Buffett stock to buy and hold for the long term.
Apple: A wide economic moat
Apple (AAPL -0.35%) is the largest holding in Berkshire's portfolio, accounting for 46.4% of its stock investments, according to whalewisdom.com. Buffett and his team of stock pickers have put their trust in this tech giant for one clear reason: Apple has a strong competitive advantage in multiple high-growth markets like smartphones, tablets, and PCs due to the immense loyalty among its customers.
That unrivaled brand loyalty allows it to charge premium prices for its devices, resulting in enormous free cash flow, a key indicator of a sound and profitable business. In 2022, for example, Apple generated an impressive $122 billion in net operating cash flow on $394.3 billion in annual revenue.
As a value investor, Buffett appreciates companies with rising free cash flow they can reinvest in their growth or return capital to shareholders. Apple, for its part, returned a whopping $22.8 billion to shareholders in the form of share buybacks and dividends during the first quarter of 2023.
Apple has also diversified its revenue streams by developing software and services that complement its devices. For instance, it recently launched its own buy now, pay later service, which could boost customer retention and spending.
This fundamentally sound business has also allowed the shares to successfully navigate the recent turbulence in the markets. Even though many tech stocks suffered a sharp decline last year, Apple's stock has managed to achieve a decent 8% increase in the last 18 months. In comparison, the Nasdaq Composite has dropped about 12% in the same time frame.
All told, Apple's wide moat, consistent earnings potential, and high margins should result in solid returns for long-term investors.
