Berkshire Hathaway Chief Executive Officer Warren Buffett is a legend in the investing world. What makes Buffett unique is the combination of his stock-picking prowess and longevity. Since taking over Berkshire Hathaway in 1965, Buffett has delivered investors a return of over 2,400,000%, or 20% compounded annually. If you were fortunate enough to buy $100 of Berkshire Hathaway stock back then, your investment would be worth more than $2.4 million today.
Buffett's greatest skill is identifying quality companies at reasonable prices and holding on to his best investments forever. With that said, Buffett and his team at Berkshire can't be right on every stock they own. Two Buffett stocks that are solid buys today are American Express (AXP -0.62%) and Marsh & McLennan (MMC -1.75%), while one stock I'd avoid for now is Capital One Financial (COF 0.16%).
Buy American Express
American Express operates the world's third-largest credit card network, trailing only Visa and Mastercard. What makes it stand out is its premium customer base and high-end card products, which customers associate with luxury. Its highly coveted Platinum card product carries an annual fee of $695 but comes with a slew of benefits, including travel credits, airport lounge access, purchase protection, and hotel room upgrades.
Its recognizable brand is a big reason Buffett bought American Express in 1995 and hasn't looked back. "You can't create another American Express," Buffett told Bloomberg in an interview. "I could create another shoe store, I could create another business publication, I could do all kinds of things with hundreds of billions of dollars, but I can't put in the minds of people what is in their minds about American Express."
Its premium customer base is why American Express's credit quality is so good. In the first quarter, its net write-off rate on card member loans and receivables was 1.7%, well below the industry average of 2.9%.
American Express is an established luxury brand with solid credit quality and has done a solid job of attracting a younger customer base, making this Buffett stock an excellent one to buy and hold for the long run.
Buy Marsh & McLennan
The next Buffett stock to buy may not be as well known by investors. Marsh & McLennan is an insurance broker and trusted company advisor that's been around for decades. Risk helps it thrive, and risk has been aplenty for companies in recent years. The COVID-19 pandemic, supply chain disruptions, inventory shortages, cyber-attacks, and extreme weather events have made Marsh & McLennan an advisor that companies turn to when it comes to managing these risks.
Over the past decade, the broker has seen strong demand for its services, as evidenced by its growth in net income and free cash flow of 9.3% and 14%, respectively, compounded annually. As a result, the stock has crushed the S&P 500 index with returns of 435% versus 218% over 10 years.
Data source: YCharts
What makes Marsh & McLennan a solid stock to own is that its resilient business always sees robust demand. For one, it is an insurance broker, helping connect clients with insurers to cover the above-mentioned risks. This segment can do well in different economic settings since companies are always looking to mitigate risks and have to deal with new threats all the time.
It is also a trusted advisor, providing consulting services, strategies, and advice on navigating workplace challenges such as compensation, benefits, and economic conditions. This business tends to thrive during an expanding economy.
But Marsh & McLennan also is well positioned to thrive no matter what the economy does, making this under-the-radar Buffett stock another solid addition to your investment portfolio.
Avoid Capital One Financial
Capital One Financial provides financial services to consumers and businesses, but its bread-and-butter business is providing consumers with Visa or Mastercard branded credit cards. According to the Nilson Report, its $535 billion in transaction volume makes it the fourth-largest credit card issuer in the U.S.
While Capital One is a good business with a cheap valuation, its customer base and the threat of a looming economic recession are two reasons I'd avoid this Buffett stock for the time being. At the end of Q1, 48% of its auto and 32% of its credit card loans were to customers with credit scores of 660 or lower -- a level generally considered subprime. Its higher concentration in these borrowers can make it more sensitive than its peers to economic conditions.
In the first quarter, Capital One's net charge-off rate on its credit card loans was 4%, which jumped from 2.2% in the same quarter last year. It also built up reserves for losses on its credit card portfolio, bringing its allowance for credit losses to $10 billion, or about 7.6% of its total portfolio.
Capital One stock may be OK if the Federal Reserve can engineer a soft landing -- a cooling of inflationary pressures without sending the economy into a recession. However, if the U.S. were to enter into a recession in late 2023 or early 2024, Capital One would undoubtedly feel the impact -- which is why I'd avoid this Buffett stock for the time being.
