If there's one thing Warren Buffett does better than just about anyone else on Wall Street, it's outperform the broader the market.
Despite being fallible, the affably named Oracle of Omaha has doubled-up the annualized total return of the benchmark S&P 500 since taking over as the CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) in 1965. On an aggregate basis, we're talking about a gain or more than 4,380,000% for Berkshire's Class A shares (BRK.A), compared to a total return, including dividends paid, of less than 30,000% for the S&P 500, as of the closing bell on Sept. 27, 2023.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Given Warren Buffett's overwhelming success for more than a half-century, it's no surprise that investors tend to mirror his trading activity to achieve outsized gains of their own. This can be done by tracking Berkshire Hathaway's Form 13F filings, which detail the company's buying and selling activity during the prior quarter.
However, not all of the more than 50 securities Berkshire Hathaway holds stakes in offer the same outlook. As we motor into October, two Warren Buffett stocks stand out as screaming buys, while another holding would be best avoided.
Warren Buffett stock No. 1 that's a screaming buy in October: Mastercard
The first Warren Buffett stock that's begging to be bought as we steam headfirst into the fall season is payment processor Mastercard (MA 0.07%).
Even the best stocks face headwinds, and Mastercard is no exception. Arguably the biggest issue for Mastercard is the uncertain health of the U.S. economy. Like most financial stocks, Mastercard is highly cyclical. If U.S. economic growth slows or shifts into reverse, the expectation would be for consumer and enterprise spending to also slow. That wouldn't be good news for a company that generates virtually all of its revenue from merchant fees associated with payments/transactions.
But there's another side to this "risk." Whereas downturns are a normal and inevitable part of the economic cycle, they're also, historically, short-lived. Out of the 12 U.S. recessions since the end of World War II, just three have lasted at least 12 months. Comparatively, almost every economic expansion has lasted multiple years, with one clocking in at more than a decade. The point is that Mastercard benefits from these long-winded expansions and gets to grow in lockstep with the U.S. and global economy over the long term.
Another reason Mastercard is protected from extended downside is management's avoidance of lending. While Mastercard would, likely, have no trouble becoming a lender, doing so would potentially expose it to loan losses and credit delinquencies during recessions. Since the company strictly sticks to payment facilitation, it doesn't have to set aside capital to cover potential loan losses. This is a subtle but important competitive advantage that allows Mastercard to quickly bounce back from downturns.
Something else to note is that Mastercard is one of relatively few companies that benefits from an inflationary environment. Since businesses and consumers still need to buy certain necessary items, higher price points for these goods and services means higher fee revenue for Mastercard. If core inflation remains stubbornly high, Mastercard's investors won't have any complaints.
Don't overlook the company's opportunity domestically and abroad, either. It's the clear No. 2 payment processor in the U.S. (the world's top market for consumption), and has a multidecade growth runway given how underbanked most emerging markets are.
A forecast average earnings growth rate of 16%, annually, over the next five years makes Mastercard a no-brainer buy in October.
Warren Buffett stock No. 2 that's a screaming buy in October: Coca-Cola
The other Warren Buffett stock that's a screaming buy for October is none other than Berkshire Hathaway's longest-held investment: beverage stock Coca-Cola (KO).
Maybe the biggest knock Coca-Cola has is that it's boring. Following more than a decade of historically low lending rates, investors have honed in on high-growth stocks and largely ignored mature businesses like Coca-Cola that offer far less volatility.
On a more company-specific basis, Coke's challenges are primarily tied to unfavorable currency movements in foreign markets, as well as consumers beginning to somewhat push back against price hikes in an inflationary environment. While these are tangible concerns, none is particularly worrisome for long-term investors or a threat to Coca-Cola's growth strategy.
What investors get with Buffett's longest-held stock is something that's incredibly hard to achieve on Wall Street: predictability. Coke has ongoing operations in all but three countries (North Korea, Cuba, and Russia), which means it's able to generate predictable cash flow in developed countries, lift its organic growth rate in emerging markets, and build on the 26 brands that are generating at least $1 billion in annual sales.
The Coca-Cola brand is also one of the most-recognized in the world. According to marketing and analytics company Kantar, Coke's products have been chosen by consumers more than any other brand for the past decade, as of 2021. This contributes to the predictability of its operating cash flow, and has assisted in lifting the company's base annual dividend for a jaw-dropping 61 consecutive years.
Investors wanting another reason to become bubbly about Coca-Cola need look no further than its successful marketing campaigns. The company is leveraging digital media and artificial intelligence (AI) to cater to younger audiences, while leaning on traditional brand ambassadors and its decades-old holiday tie-ins to engage more mature audiences.
As of the closing bell on Sept. 27, shares of Coca-Cola could be purchased for less than 20 times forward-year earnings. That's the cheapest shares have traded on a forward-year basis since 2013.
Image source: Getty Images.
The Warren Buffett stock to avoid in October: Snowflake
However, not all Warren Buffett stocks are necessarily worth buying. The perfect case in point is data-warehousing company Snowflake (SNOW 3.69%), which is the Buffett stock to avoid in October.
Just as the stocks I've highlighted to buy have headwinds they're contending with, the stock to avoid, Snowflake, has potential catalysts that could send its valuation higher. For instance, enterprise cloud spending is still in its very early innings. As businesses transfer more of their data and platforms into the cloud, demand for Snowflake's cloud-based solutions should only grow.
Snowflake also brings competitive advantages to the table. Its cloud-based infrastructure is layered atop the most-popular cloud infrastructure service platforms, which allows its members to seamlessly share data. Further, it charges its customers based on the amount of data they store and how many Snowflake Compute Credits they use. The key takeaway here is that Snowflake's pricing strategy is highly transparent, and its customers seems to appreciate it.
But there are three reasons why buying Snowflake stock right now doesn't make a lot of sense. The first is near-term economic uncertainty. A host of metrics point to the growing likelihood of a U.S. recession in the coming quarters. This suggests businesses may pare back their spending, which could slow Snowflake's growth rate.
Secondly, we're already seeing Snowflake's growth rate meaningfully decelerate. Whereas investors were willingly paying a premium to own shares of Snowflake when its organic growth rate was 70% or higher, the company's sales growth for fiscal 2024 (the company's fiscal year ends January 31) has been reduced a couple of times and now sits at 34%. While this is still a phenomenal growth rate in a challenging environment, it's clear that Snowflake's momentum is beginning to fade.
The third glaring problem is the company's valuation. When things are uncertain from an economic perspective, investors aren't typically willing to pay 142 times adjusted forward-year earnings for a company whose sales growth is decelerating.
While Snowflake offers long-term intrigue, there's plenty of reason to believe its share price heads lower from here.
