Given his remarkable track record of compounding capital for multiple decades at Berkshire Hathaway, it's not surprising that individual investors like to look at the Warren Buffett conglomerate's enormous portfolio to find winning stock ideas. Even small positions can be worthwhile investment candidates.
Among the dozens of Berkshire holdings, investors might want to take a closer look at Visa (V 0.80%) and Mastercard (MA 1.33%). Together, they make up just 1.1% of its portfolio. But that doesn't mean they don't have sizable upside.
In fact, these two financial stocks could turn $100,000 into $1 million over the next 20 years.
NYSE: V
Key Data Points
Running the numbers
For a stock to rise 10-fold in 20 years, it would translate to a roughly 12.2% annualized increase. That would be a fantastic return that exceeds the S&P 500's long-run average of about 10%. Investors can gain confidence knowing that Visa's and Mastercard's shares have climbed 900% in just the past 12 or so years, give or take a few months. So, as we look ahead, investors are expecting the returns to slow a bit.
I think that's a totally reasonable expectation. These two businesses are worth hundreds of billions of dollars each. Naturally, their future returns probably won't match the past. But the gains will still be respectable.
So many wonderful qualities
Investors should have confidence that these two companies will be top performers in their portfolios. For starters, Visa and Mastercard both have stellar track records of financial performance. In the past five years, despite dealing with a global health crisis and macro headwinds, both companies were able to report double-digit percentage earnings per share growth on an average yearly basis. This points to their durability, which should give shareholders peace of mind.
There's plenty of reason to believe that the growth will continue for the foreseeable future. Even though Visa handled a whopping $3.9 trillion in payment volume last quarter, and Mastercard processed $2.4 trillion, they continue to benefit from the growth of cashless transactions. There is a lot of opportunity to further penetrate less developed markets around the world, where a higher percentage of the population is underbanked, especially when compared to the U.S. or Western Europe.
Visa and Mastercard face minimal threat of disruption, in my opinion. And the presence of an economic moat raises the chances that both businesses will be thriving two decades from now.
With their massive global two-sided payments networks that connect consumers and merchants, both Visa and Mastercard benefit from powerful network effects. It's virtually an impossible task for someone to come around and create a new payment platform from scratch that can compete with these two giants. Combined, Visa and Mastercard handle about 75% of all the card payment volume in the U.S.
NYSE: MA
Key Data Points
Don't ignore valuation
When looking at stocks to buy, the last thing investors want to do is overpay. Paying too much lowers potential future returns. This doesn't appear to be the case in this situation.
As of this, Visa and Mastercard trade at forward price-to-earnings ratios of about 29 and 33, respectively. Because of impressive underlying fundamental performance and network effects, it's worth paying this premium valuation, in my opinion. Add in the fact that Visa and Mastercard post some of the highest operating margins you'll ever see, and this looks like a no-brainer decision.
Buffett's Berkshire Hathaway owns dozens of stocks. But if you're looking to turn $100,000 into $1 million between now and 2044, you'd struggle to find two better choices than Visa and Mastercard.
