Thanks to his impressive track record, investor Warren Buffett's moves are followed by many who are looking for top stocks to buy. Investors peek at the holdings of his Berkshire Hathaway for inspiration.
Inside the conglomerate's massive $373 billion portfolio, there are dozens of companies. Three of them dominate the payments landscape and should be on every investor's radar. Let's take a closer look at American Express (AXP -0.62%), Visa (V -0.23%), and Mastercard (MA 0.07%).
Amex is a top Berkshire position
American Express is the third-largest holding for Berkshire, which has a position valued at $32 billion. Berkshire has a massive 21% stake in the credit card leader, and it's not hard to figure out why.
Amex fits a lot of the criteria the Oracle of Omaha seeks in his investments. For starters, it possesses a strong economic moat. The company is one of the strongest brands in the world and attracts a wealthier customer base. Moreover, by connecting merchants and individuals, the business benefits from powerful network effects.
Buffett likes to own stocks over an indefinite holding period. The above traits demonstrate that it's not hard to have confidence that Amex has staying power.
The stock currently trades at a price-to-earnings (P/E) ratio of 19, which is in line with its trailing-10-year average. This seems like a reasonable entry point for prospective investors because Amex continues to experience positive momentum.
It posted revenue (net of interest expense) of $60.5 billion in 2023, up 14% year over year. Diluted earnings per share were also up 14%. Management expects double-digit top- and bottom-line gains this year, as well.
Visa and Mastercard look great
In the last decade, shares of Visa and Mastercard have returned a remarkable 395% and 502%, respectively. These are fantastic gains that exceed the S&P 500's performance. Consequently, the stocks don't look like screaming bargains right now since both trade at a price-to-earning multiple above 31.
But don't let the seemingly elevated valuations discourage you. These two businesses might deserve those price tags, thanks to their high quality.
Unlike American Express, Visa and Mastercard don't lend capital to consumers. Instead, they partner with various banking institutions that must find customers, run credit checks, handle payments, and take on the default risk. As a result, you won't see them earning interest income.
But similarly to Amex, Visa and Mastercard operate the so-called payment rails that connect consumers and merchants, allowing them to transact all over the world. And this capital-light model creates two of the best businesses on the planet.
Both Visa and Mastercard have tremendous network effects. They each have billions of cardholders and tens of millions of places that accept their cards.
As they get bigger, their networks will become more valuable to all stakeholders. This massive scale, with a combined payment volume of $6.3 trillion in the last three months of 2023, makes it almost impossible that these two companies will ever be disrupted.
And these businesses are incredibly profitable. Visa's quarterly operating margin in the last five years has averaged 66%, while Mastercard's has averaged 55%. You'd struggle to find companies that are better able to convert sales into operating income.
Berkshire Hathaway doesn't own larger stakes in these two businesses perhaps because Buffett might think the valuations are steep right now. But that doesn't mean the stocks shouldn't be on your investing radar. It's a good idea to learn more about Visa and Mastercard and how you could benefit by dollar-cost averaging into the stocks over time.
