Tag Archives: MCO

3 Stocks for Warren Buffett Fans

Warren Buffett is so good at picking winning businesses that he grew Berkshire Hathaway’s book value by more than 19.1% annually between1965 and 2017. That astounding track record easily qualifies him as the greatest investor of all time.

So which of Buffett’s stocks do we Fools think are great buys right now? We asked a team of Motley Fool investors to weigh in and theypicked Markel (NYSE:MKL), Goldman Sachs (NYSE:GS), and Moody’s (NYSE:MCO).

Headshot of Warren Buffett.

Image source: The Motley Fool.

Following in Buffett’s footsteps

Dan Caplinger (Markel): Warren Buffett gave the world a great method of making money: Open a successful insurance operation and then invest the premiums that clients pay in investments that pay a lot more than the fixed-income securities that most insurance companies choose for their portfolios. Markel’s history as a publicly traded company dates back to 1986, and the company has an extremely good track record of generating positive underwriting profits, running about 70% with several years sporting very attractive returns.

Markel still has a much different emphasis than the Oracle of Omaha’s insurance operations. Rather than having brand-name car insurance that ranks among the nation’s most popular brands, Markel instead offers only specialty lines of insurance. There’s not as much volume for the types of insurance that you can get from Markel as there is for vanilla lines like auto, home, or life insurance. But because it’s tough to find other companies that are willing to take on the risks that Markel’s willing to assume, the specialty insurance company is able to get enough of a margin to protect it from adverse events. Moreover, because it writes a lot of different types of insurance, Markel’s different risks aren’t as correlated with each other, making a catastrophic year where everything goes wrong less likely.

With a sizable investment portfolio, Markel has generated strong returns the same way Buffett has. As long as its stock-picking prowess remains good, Markel should continue to find ways to deliver performance for its shareholders.

Lots of untapped consumer banking potential and a big partnership deal

Matt Frankel (Goldman Sachs): One Buffett stock that I’ve got my eye on right now is Goldman Sachs. One of several bank stocks in Berkshire’s portfolio, Buffett’s Goldman investment originated in the wake of the financial crisis, and currently represents a roughly 3% stake in the investment banking giant.

While I’m excited about the bank’s performance so far in 2018, the real reason I like Goldman over the rest of Buffett’s bank stocks is for the massive potential to grow its young consumer banking operations.

In late 2016, Goldman started offering personal loans through its Marcus platform, and to say that it has been a success would be an understatement. Marcus crossed the $1 billion lending threshold after just nine months of operations and recently surpassed $3 billion in total loans. The U.S. unsecured lending market is over $1 trillion in size, so there’s still tremendous room for growth here.

Speaking of growth, Goldman is about to take its first steps into the credit card business, and just scored a big partnership that could translate to billions in annual payment volume right away. Starting in early 2019, Goldman will be Apple’s (NASDAQ:AAPL) credit card co-branding partner, replacing Barclays, and will issue a new product under the Apple Pay brand name. What’s more, it has also been reported that Goldman could take over the financing for Apple’s stores. Apple did over $60 billion in sales in the last quarter alone, so if Goldman could even get a small fraction of Apple’s customers to use the new card for their purchases, it could be a big deal revenue-wise.

This financial stock is built for growth

Brian Feroldi (Moody’s): When a government or company wants to float a bond or two their first step is to get it rated. The reason is that bond buyers demand an independent assessment of how likely the bond is to be repaid, which is kind of an important thing for them to figure out ahead of time. Furthermore, these bond buyers usually won’t trust a rating from just anybody; instead, they give preferential treatment to ratings that are made by one of the “big three” rating agencies (Fitch, S&P Global, or Moody’s). A rating from one of the big boys can go a long way to give bond buyer’s confidence that the bond will be repaid in full once it matures. That confidence increases their willingness to accept a lower interest, which can save the issuer millions of dollars in interest payments.

With so much power concentrated in the hands of the “big three,” these companies have turned intohighly lucrative businesses. Take Moody’s as an example. This stock boasts extremely high returns on capital and cranks out more than $1 billion in free cash flow each year. Management has a long history of using that excess cash to buy back stock, make tuck-in acquisitions, and boost its dividend payment (its most recent dividend hike came in at 16%). Perhaps it’s no wonder why this stock has been in Buffett’s portfolio for years.

When factoring in volume growth, price increases, acquisitions, and stock buybacks, Wall Street currently estimates that Moody’s profits will grow by more than 16% annually over the next five years. That’s quite fast for a business that is trading for less than 20 times forward earnings and sports a dividend yield of about 1%. Adding in the fact that it comes with Buffett’s seal of approval makes it all the more enticing.

3 Best-Performing Warren Buffett Stocks In The First Quarter

Like most investors, Warren Buffett didn’t have a great first quarter. Buffett’s Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) gained less than 1% through the end of March. That was enough to beat the S&P 500 index, but I doubt Buffett broke out his ukelele to strum and celebrate.

However, several Buffett stocks chalked up nice gains during the first quarter. The three top performers in Berkshire’s portfolio were Sirius XM Holdings (NASDAQ:SIRI), Mastercard (NYSE:MA), and Moody’s (NYSE:MCO). Here’s what drove these stocks higher — and what their prospects are for the rest of 2018.

Sirius XM Holdings
Sirius XM Holdings ranked as Buffett’s biggest winner, with its share price jumping 16% in the first quarter. There were a couple of key factors behind the satellite radio stock’s strong performance.

First, Sirius XM posted solid subscriber growth for 2017. The company’s net gain in subscribers was lower than in the prior year. However, any growth for Sirius XM is great, because Sirius XM largely has fixed costs. Much of the added revenue from gaining more subscribers goes right to the company’s bottom line.

Second, the company introduced its new 360L platform. The platform will allow subscribers to the Sirius XM All Access service to access more than 200 channels and over 5,000 hours of On Demand episodes of favorite shows. 360L offers personalized recommendations, with the vehicle’s driver, front-seat passenger, and a backseat passenger each having their own individual listening profiles. The platform will initially be available in the 2019 Dodge Ram 1500 pickup truck, but 360L could be a growth driver for Sirius XM in other vehicles in the future.

Can Sirius XM keep the momentum going? It depends on the company’s ability to continue attracting new subscribers and holding on to existing ones. With new products like 360L, its “radio of the future,” the prospects for Sirius XM could be pretty good.

Mastercard wasn’t far behind Sirius XM, with a first-quarter gain of nearly 16%. The global payments technology company has definitely been firing on all cylinders.

In its 2017 fourth-quarter update in February, Mastercard reported 20% year-over-year net revenue growth and a 33% year-over-year adjusted earnings per share increase. Fueling these strong results was a 17% jump in switched transactions — the number of times one of the company’s credit cards was used to make a purchase.

Mastercard stands to receive a nice windfall from U.S. corporate tax reform, in the ballpark of $450 million. The company plans to use this money in several ways, including investing in things that should generate growth, such as digital infrastructure and data analytics.

The stock isn’t cheap, with shares trading at 24 times expected earnings. However, Buffett isn’t the stickler for low valuations he was earlier in his career. He knows that sometimes, the best stocks come at a higher price. Mastercard certainly appears to be in that category. I expect Mastercard’s success in the first quarter will carry over through the rest of the year.

Berkshire Hathaway owns close to 24.7 million shares of Moody’s stock, but Buffett probably wishes he had even more. Moody’s share price rose more than 9% in the first quarter, making it Berkshire’s No. 3 best-performing holding during the period.

Like Mastercard, Moody’s posted strong fourth-quarter results. Revenue shot up 24% higher than the prior-year period to an all-time high of $1.17 billion. The company reported solid earnings after experiencing a big net loss in the fourth quarter of 2016. While Moody’s is best known for publishing credit ratings, its Moody’s Analytics (MA) segment, which offers financial analysis and risk-management services, contributed the greatest revenue growth.

Also like Mastercard, Moody’s should get a boost in 2018 from U.S. tax reform. The company’s tax rate is expected to drop from 43.6% in 2017 to between 22% and 23% this year.

Moody’s thinks 2018 should be another banner year. The company expects revenue growth in the low double-digit percentages. With the tailwind of tax reform at its back, Moody’s should be able to increase its earnings per share by more than 40%. That’s the kind of growth that should put a smile on Buffett’s face.
Best pick for the future

Buffett’s big winners of the first quarter could all continue to succeed over the long run. I think the best pick of the three, though, is Mastercard.

There are a couple of major growth drivers for Mastercard. Online sales continue to increase, most of which are paid for using credit cards. Business-to-business transactions also present a massive untapped market for payment processors. I think Mastercard is the kind of stock that could prompt Buffett to strum on his ukelele in celebration of big gains — a scene that would be, of course, priceless.

This article originally appeared on The Motley Fool.