Warren Buffett's investing prowess is legendary. After all, he's not called the Oracle of Omaha for nothing. If you're seeking stocks to buy, looking at Berkshire Hathaway's current holdings provides a good starting place. Of course, even Buffett makes mistakes. Hence, you have to do your own homework.
After doing mine, I've concluded that Amazon (AMZN 3.43%), Procter & Gamble (PG -0.78%), and Moody's (MCO 0.25%) present good long-term return potential for buyers now. Here's why.
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1. Amazon
Amazon's days of growing sales at all costs are behind it. Many know the company as an online seller of nearly every good imaginable. But there's much more to the company. And it's now a very profitable enterprise.
The company's cloud services unit, Amazon Web Services (AWS), continues to generate a significant profit margin. In the second quarter, AWS' operating income fell from $5.7 billion in the prior-year period to $5.4 billion. The margin was 24.2%, down 5.8 percentage points from last year.
But the future looks bright. Costs were higher as management invested in technology and infrastructure. Those outlays should pay off as AWS, with its leading share of the cloud infrastructure market, remains poised to take advantage of favorable trends, including increased use of artificial intelligence applications. The unit's sales grew by 12.2% year over year to $22.1 billion.
There's more to the business, of course. Amazon's total sales grew by 10.8%, and operating profit more than doubled to $7.7 billion. Looking to the future, Amazon is set to capture favorable trends. This includes a fast-growing advertising business. Amazon collects data that advertisers can use, and its ad business has been growing by over 20%. Last quarter, advertising services were $10.7 billion, 22% higher than a year ago.
Amazon's price-to-sales ratio stands at 2.4. That's roughly in line with the S&P 500's average sales multiple.
2. Procter & Gamble
While Procter & Gamble may not see exceptionally high sales growth, its stable of popular brands does well regardless of economic conditions. These include items like shampoo, razors, toothpaste, laundry detergent, and diapers sold under brands like Head & Shoulders, Gillette, and Pampers.
In the company's fiscal 2024 first quarter, which ended on Sept. 30, its organic sales (excluding foreign exchange rate shifts, divestitures, and acquisitions) grew by 7%. Management was able to raise the prices it charged for its consumer goods, and those price hikes accounted for the entire top-line increase, while falling volumes only took away 1 percentage point in a challenging environment for consumers. Management expects 4% to 5% sales growth for the year and a 6% to 9% increase in diluted earnings per share.
Those numbers might not excite growth investors, but the company's steady approach should appeal to dividend investors. Procter & Gamble generates plenty of free cash flow -- its $13.8 billion total last year provided plenty of cushion to cover its $9 billion dividend commitment.
A consistent business and strong cash flow generation has allowed Procter & Gamble to increase dividends for 67 straight years, making it a Dividend King. The stock at its current price has a 2.5% dividend yield compared to the S&P 500's 1.6% payout.
3. Moody's
While many know about Moody's ratings business, it also has an analytics business. The former gets paid to rate various entities' credit instruments, while the latter provides data and research that helps organizations manage risk.
The analytics business has been growing consistently. In the second quarter, revenue from Moody's Analytics rose by 11% to $747 million as insurance and banking clients clamored for its offerings.
Moody's Investors Service, the ratings business, has more cyclical results that depend on factors such as new bond issuance. Last quarter, its revenue grew by 6% to $747 million. But its competitive position remains strong as one of three major credit rating agencies.
The combination continues to grow profits. Second-quarter diluted earnings per share increased by 16%.
Finally, let's consider valuation. The stock trades at a price-to-earnings multiple of 40 compared to 24 for the S&P 500. While that's a higher multiple than the overall market, the company's double-digit percentage earnings growth warrants a premium.
As Buffett himself has famously said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. I'd certainly put Moody's in the former category.
Amazon offers exciting growth prospects, while Moody's offers consistent revenue and profit growth. Procter & Gamble generates plenty of cash flow and should appeal to dividend investors.
