Investors trust Warren Buffett's stock picks for one particular reason: his track record. The billionaire, at the helm of Berkshire Hathaway for nearly 60 years, has led market-beating gains over that time period. Berkshire has delivered a compounded annual gain of about 20%, while the S&P 500 generated a compounded increase of 10%.
So, investors know that Buffett's strategy has worked over and over throughout the years. One thing that's very important to Buffett when buying a stock is valuation. The top investor looks for players that are undervalued or at least trade at reasonable levels -- he won't pay ridiculous amounts to get in on a company. Buffett also likes companies with a strong moat, or competitive advantage, and always appreciates a growing dividend.
I considered all of this as I looked into Buffett's portfolio and decided which stocks make the best buys with $500 right now. With that amount, you can either invest in one of the following or get in on both. Let's check them out.
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1. Coca-Cola
If you visit Buffett in his office, you might find him with a glass of Coca-Cola (KO +0.68%) in his hand -- but Buffett didn't buy this stock several years ago just because he likes the company's eponymous beverage. One of the reasons he bought it is because he knows so many others in the world like the drink too. The company has a solid brand moat, meaning soda drinkers will specifically ask for Coca-Cola and won't take just any other cola beverage.
The company doesn't count on one drink, though, and instead has a portfolio of 200 brands, including sparkling beverages, water, coffee, juices, and more. Many of these brands are well-known names, but Coca-Cola isn't relying on that to keep growth going. The company also innovates to suit the tastes and priorities of specific markets.
All of this has kept it in its spot as the world's biggest seller of non-alcoholic beverages and has helped it gain market share quarter after quarter.
NYSE: KO
Key Data Points
Finally, another reason to get in on this stock is that the company will pay you just for owning it: Coca-Cola not only offers investors a dividend, but it's also increased the payment for more than 50 years, earning it a spot on the list of Dividend Kings.
Coca-Cola's valuation doesn't fluctuate by much -- it trades for 23x forward earnings estimates now, with a range of about 20x to 25x over the past three years. So, at today's level, it's a very reasonable buy.
2. UnitedHealth Group
UnitedHealth Group (UNH +1.18%) has gone through some tough times over the past year. The company unexpectedly lost its chief executive officer, the Justice Department launched a probe into its Medicare billing processes, and earnings have suffered due to a variety of challenges.
And yet, top investor Buffett bought the shares this year. Here's why UnitedHealth looks like a promising recovery story.
NYSE: UNH
Key Data Points
First, it's important to consider that, as the biggest U.S. health insurer with health insurance and services units, the company has a significant moat. Second, UnitedHealth has taken action to address key issues weighing on earnings -- from higher healthcare costs to greater-than-expected use of certain services. The company has made several moves, such as adjusting prices, cutting certain plans, and even using artificial intelligence (AI) to gain efficiency.
All of this is starting to produce results. In the latest quarter, UnitedHealth raised its full-year earnings outlook, and new CEO Stephen Hemsley said actions taken now should support "higher and sustainable double-digit growth beginning in 2027 and advancing from there."
Meanwhile, the stock is trading for 20x forward earnings estimates, down from more than 32x earlier this year -- this is a great entry point considering UnitedHealth's long-term prospects.
Buffett probably liked UnitedHealth's moat and price tag. While the moat will last, the price may not, making now the perfect time to invest at least part of your $500 in this Buffett stock.
