Warren Buffett has been a pretty good investor, to say the least, since his takeover Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) when it was a struggling textile maker in 1965. And the list of stocks he owns is a great place to start looking for investments today. Three of these titles currently stand out as excellent opportunities.
Apple (NASDAQ: AAPL), US Bancorp (NYSE: USB), and Snowflake (NYSE: SNOW) represent different segments of the economy and use significantly different business models. However, they each have characteristics that could produce above-market returns for shareholders in the years to come.
Apple’s rebirth in the early 2000s with the iMac and the iPod changed the market. The iPhone virtually transformed the company in the 2010s. Now, its ability to leverage the iOS platform on these devices to sell high-margin services has made it the largest company in the world. Its current market capitalization is approximately $ 2.2 trillion.
Most thought Buffett was too late when he bought the stock in 2016, but shares have risen around 400% since then and have earned Berkshire Hathaway almost $ 100 million. It is not yet too late to buy stocks. In its just released second quarter, spanning the three months ending March 27, Apple has released some incredible numbers. Revenue hit a record $ 89.6 billion, up 54% from the same quarter last year. Management increased the dividend by 7% and the service mix continued to drive up margins.
|Period||Service revenues||Services as a percentage of revenue||Gross margin on services|
|Q1 and Q2 2021||$ 32.7 billion||16.2%||69.3%|
|2020||$ 53.8 billion||19.6%||66%|
|2019||$ 46.3 billion||17.8%||63.7%|
|2018||$ 39.8 billion||15%||60.8%|
Apple has proven two things over time: it can quickly keep up with new trends and integrate these new offerings into its iOS operating system in a way that customers naturally embrace them. As the company evolves over the next several decades, management will ensure it has an offering that “works best” for users. It could be an iCar, a self-driving taxi service, or something no one has imagined yet. The proof is in the numbers. Apple now has twice as many paid subscriptions for its services than just 2.5 years ago. With much of our lives now tied to our mobile devices, the installed base and proven approach make Apple stocks a buy and hold for anyone who thinks long term.
2. US Bancorp
US Bancorp is Buffett’s prototype holding company. Even for a bank, the Minneapolis-based company is a stable and conservative operation. The fifth largest bank in the United States is not as well known as its counterparts, probably because it is a regional operation. Unlike the Wall Street titans, regional banks get most of their money from traditional mortgage and small business loans, as well as interest on deposits. The resumption of the pandemic has strengthened these professions and benefited actions. the ETF S&P Regional Banking (NYSEMKT: KRE) is up 94% last year, compared to 68% overall SPDR Selective Financial Sector ETF (NYSEMKT: XLF). US Bancorp can claim the best performance of regional banks, consistently delivering a better return on equity than its peers. The only exception is SVB Financial, which has benefited from its focus on venture capital, start-ups and private equity in recent years.
|Regional bank||Market capitalization||Avg. Return on equity 2016-2020|
|American Bank||$ 88.9 billion||13.4%|
|Truist Financial||$ 79.7 billion||8.4%|
|PNC Financial||$ 79.5 billion||10.8%|
|First Republic||$ 31.9 billion||11%|
|SVB Financial||$ 31.1 billion||16.4%|
|Fifth third bank||$ 28.9 billion||11.7%|
Despite the power the media has attributed to the Federal Reserve to keep rates low, the market is expected to continue to push rates higher as the economy recovers. This is good news for banks that earn their money from interest and loans. With just 12.7 times analysts’ earnings forecast for this year and a dividend yield of 2.8%, perhaps now is a great time to add US Bank stocks to a portfolio.
It was almost certainly one of Buffett’s lieutenants who bought the data cloud service provider Snowflake. The combination of technology and pricing certainly does not fit its model, and the stock is often criticized for its price to perfection. But that’s exactly what the company provided. The combination of adding more customers, increasing spending for those customers, and not having a subscription model makes traditional valuation metrics somewhat misleading.
Many will look at the 105 price / sales ratio for Snowflake and conclude that it is far too high, even for a company that has just grown sales 116% year over year. Like most cloud businesses, revenue is recognized over the life of a contract, not when the business makes a sale. This makes the remaining performance obligations (RPO) a critical metric. It actually shows investors how much business the company has earned. For Snowflake, RPO increased 213% year-over-year for its 2021 fiscal year which ended on January 31. This means that the company has grown almost twice as fast as it appears.
This disconnect makes more sense when looking at what customers are spending with the business. Again, the traditional metric of the number of customers hides the real momentum of the business. The number of customers spending over $ 1 million per year and Net Income Retention (NRR) have outpaced customer growth.
This last metric is best explained by an example. For the most recent fiscal year, the NRR of 168% means that February 2019 customers spent almost $ 1.70 between February 2020 and January 2021 for every dollar spent between February 2019 and January 2020. The result is that existing customers are increasingly paying Snowflake overtime.
|Fiscal year (ending January 31)||Customer growth||Customer spend growth> $ 1 million||Retention of net income||Remaining growth in yield bonds|
These non-traditional metrics make it clear that Snowflake is growing at an astronomical rate and that customer spending is barely slowing. With its massive data cloud, Snowflake could in the future seamlessly overlap with services such as security and analytics to drive even more cost savings per customer. High growth stocks are much more prone to volatility, so buying stocks is not for the faint of heart. That said, this unconventional holding company could end up being one of Buffett’s best performances over the next few years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.