You may have heard the slogan, "This, not that." The mantra encourages people to think about their decisions. Something popular might not benefit you, so consider a similar, better alternative.
It's a fun game that came to mind when thinking about some of Warren Buffett's investments, which are held in Berkshire Hathaway, his holding company. Some of Berkshire's most significant and best-performing stocks aren't always right for everyone. Fortunately, you don't need to go off the beaten path to find that good alternative.
Here are two trillion-dollar companies that Berkshire owns. One is a screaming buy today, while the other is best for investors to avoid -- at least, for now.
Buy this: Amazon
Though it's not a massive position at just 0.4%, e-commerce and cloud leader Amazon (AMZN 3.43%) has been a holding of Berkshire Hathaway since 2019. Most people are familiar with Amazon's e-commerce business, which dominates the U.S. with a 38% market share. Some may also know that Amazon's cloud platform, AWS, is the global leader, with roughly a third of the worldwide market. Even fewer likely know that Amazon is quickly becoming an advertising powerhouse.
What should attract buyers to the stock today is a valuation that's sneakily attractive even as the stock trades near its highest price in a year. Amazon's business has many moving parts, and e-commerce requires investments to expand to accommodate growth.
So I like looking at Amazon's operating cash flow (revenue minus expenses from running the company) to understand how much of a bargain the stock is. Comparing its price to its operating cash flow per share, you'll see that the stock is near its cheapest valuation in a decade:
AMZN Price to CFO Per Share (TTM) data by YCharts
That's a great launch pad for future investment returns. After all, e-commerce and cloud computing are massive industries that should still have many years of growth ahead.
Being a market leader, Amazon will almost surely capture a solid piece of these growth trends over the coming years. Analysts believe that could translate to annualized long-term earnings growth averaging 24%. This setup makes Amazon a "Magnificent Seven" stock you can continue buying confidently.
Not that: Apple
Seeing iPhone maker Apple (AAPL -0.35%) here might be jarring. After all, it's Berkshire's largest stock investment by a wide margin, nearly half of its entire portfolio. Buffett himself has even called Apple the best business Berkshire owns. But this ultimately boils down to timing. Apple is undeniably one of the world's most significant financial and cultural companies. People, myself included, love their iOS devices.
But the company has gotten so big that growth is getting harder. Apple's revenue growth has slowed dramatically in recent years since it brought 5G iPhones to market. There doesn't seem to be a big motivator for many consumers to switch as often, and there are already over 2 billion active iOS devices worldwide. Naturally, slowing revenue growth has caused analysts to continue lowering their long-term expectations for earnings.
AAPL EPS LT Growth Estimates data by YCharts
Ironically, the stock continues to thrive. Shares are at all-time highs, and the stock's valuation has increased to over 28 times estimated 2024 earnings. The risk to new buyers is that sentiment might cool on the stock if Apple can't increase the growth to justify such a lofty price tag. Its current PEG ratio is roughly 3, indicating that shares are pretty pricey for their expected growth. I like to see this ratio under 1.5.
Those who own the stock can feel free to hold it because Apple is a remarkable company. It's just run high enough that new buyers may find better alternatives like Amazon. The stock will again be a fantastic buy-and-hold idea once the valuation makes more sense.
