The financial sector is the bedrock of the world's economy. It's worth an estimated $22 trillion, nearly a quarter of global gross domestic product (GDP). Given these facts, it's unsurprising that famed investor Warren Buffett has numerous financial stocks within the larger portfolio he oversees for his holding company Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%).
Buffett has quite the reputation for picking winners over the years, so new investors could do worse than potentially follow his lead and add some of these stocks to their portfolios as well. But Buffett isn't perfect and there are also stocks in Berkshire's portfolio that aren't good buys right now. If you are looking for a great starting point to begin your investing adventures, consider these two financial stocks potentially worth scooping up. There's also at least one in the bunch you'll be better off avoiding right now.
Buy: American Express
Payments and credit card company American Express (AXP -0.62%) wouldn't seem like a stock you'd want to buy right now. Defaults on car and personal loans recently hit their highest points in the past decade, signaling weakening consumers and a potentially tricky operating environment for lenders like American Express. Credit cards are unsecured loans, meaning no asset is tied to paying them back. Struggling people will pay their mortgage and car loans first because they don't want them taken away.
But American Express recently announced its third-quarter earnings and gave Wall Street some good news. The company posted record revenue and earnings per share (EPS), driven by strong spending on travel and restaurants. Additionally, management noted that it expects full-year results on par with guidance given at the beginning of 2023. Provisions for credit losses, or bad loans, did increase 58% year over year and should be monitored, but it wasn't enough to dampen management's outlook.
Meanwhile, the stock trades at a forward price-to-earnings (P/E) ratio of less than 13, despite analysts expecting more than 14% annual earnings growth over the coming years. That's a price/earnings-to-growth (PEG) ratio of less than 1, arguably making the stock a bargain.
Buy: Nu Holdings
People living in mature economies like the United States probably take their access to banking services for granted. But it's not that simple in some areas, like Latin America, where just half of adults have a bank account. Nu Holdings (NU 1.66%) is a digital bank serving the Latin American region. Nu has over 68 million active customers who bank, borrow, and invest.
The company became increasingly profitable over the past year. Earnings in the second quarter of this year were $224.9 million on $1.86 billion of revenue. According to estimates, analysts expect Nu to earn $0.20 per share this year, which could grow to $0.78 by 2026. Nu probably won't have any problems finding the opportunities to hit those numbers and grow beyond them -- there are more than 666 million people in Latin America. That means hundreds of millions without banking access today.
The stock trades at a forward P/E of 41, but that will get cheaper quickly if Nu successfully grows its bottom line. Shares trade at just 10 times estimated 2026 earnings. The potential for economic growth in Latin America makes Nu a solid choice for investing in the region's long-term upside.
Avoid: Bank of America
Mega-bank and Buffett's second-largest holding Bank of America (BAC -0.21%) might surprise some by landing in the avoid part of this report. However, banks as a whole could be in for a rough stretch. Currently, 60% of economists expect a recession to occur, and consumer defaults on personal and auto loans are already at a decade high. That could mean increased losses for lenders and less demand for new loans.
Additionally, interest rates rose significantly over the past 18 months, creating unrealized losses for many assets (loans) on Bank of America's balance sheet. As of the third quarter, Bank of America had $106 billion in unrealized losses on the mortgage-backed securities and Treasury bonds it owns in its portfolio. This means they went down in value, but like a stock, those losses aren't felt unless sold. The only realistic scenario where Bank of America would sell these loans at massive losses would be if a bank run occurred and it had to meet withdrawal requests.
Bank of America has $351 billion in cash and equivalents on its balance sheet against $1.9 billion in deposits, so it would take a considerable run to cause a crisis. This will probably not happen, especially to a bank Warren Buffett is deeply invested in and has backed before. Still, the riskier environment for banks might make it wise to look elsewhere.
