Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is well known for its massive stock portfolio, which has dozens of common stock positions, many of which were hand-selected by legendary investor Warren Buffett himself.
To be sure, there's a solid investment case to be made for virtually all of them. Buffett tends to invest in stocks that have durable competitive advantage, attractive valuations, and other clearly identifiable reasons why they're attractive investments. However, some are far more appealing than others right now. Here are two stocks in particular from Berkshire's portfolio that are worth a closer look, and one that I'm staying away from even though it's a Warren Buffett favorite.
A highly profitable bank with interesting potential
Capital One Financial(NYSE: COF) is an interesting bank stock right now and is one of the few large banks trading for less than its book value right now.
While it's best-known for its credit card business, Capital One is a full-service bank with an extensive branch network in the Washington, D.C. metro area. Because of the high-interest nature of the credit card business, Capital One has a net interest margin of 6.7% -- more than double what most other large banks produce. Plus, as one of the few branch-based banks that offers high-yield savings accounts and CDs, the company has grown its customer deposits by 7% year over year. There is certainly some recession risk in the credit card business, but Capital One's default rate is reasonable, and the bank has plenty in reserves to cover potential losses.
Perhaps most significantly, Capital One is planning to acquire Discover Financial Services(NYSE: DFS) in an all-stock deal. Not only will this make Capital One's credit card business far larger, but it will give Capital One its own payment network, which will ultimately make the bank far less reliant on Visa and Mastercard. Management expects $2.7 billion in synergies from the deal by 2027, and much of that is from network savings.
A leader with a superior cost structure
Ally Financial(NYSE: ALLY) is a leading auto lender that has a rapidly growing online banking operation. Berkshire owns 9.5% of Ally, and there are plenty of reasons Buffett might be a fan.
For one thing, Ally has several competitive advantages, such as relationships with more than 22,000 vehicle dealerships, a high level of automation, and the superior cost structure that comes with online banking versus branch-based banking. It's also a high-margin business, as the average retail auto loan it originates has a 10.6% interest rate. With a deposit cost of about 4% and a net charge-off rate of less than 2%, it's easy to see why this can be such a profitable business.
Ally is also a rather cheap bank stock, with shares trading 25% below its 52-week high and for a forward P/E multiple of just 8.8.
This Buffett favorite isn't for me
It's clear that Buffett is a fan of Occidental Petroleum(NYSE: OXY), as he has bought the stock frequently in recent years, and Berkshire now owns more than 27% of the oil company. But it's one stock I'm happy watching from the sidelines.
For one thing, the company is highly sensitive to the price of oil, even relative to other major oil and has companies, as its main focus is extracting oil from the ground. This is why Occidental has underperformed peers recently, as crude oil has dropped by more than 15% since midyear.
Debt is also an issue that makes me nervous, and although management is doing a good job of debt reduction, this could eat into cash flow for the foreseeable future.
Another Buffett stock could be the better option for you
As a final thought, if you can't decide which "Buffett stocks" are best for you, there's nothing wrong with buying Berkshire Hathaway itself and getting exposure to all of them. In fact, another reason I have no real desire to invest in Occidental is that Berkshire is one of my largest stock investments and therefore I have significant indirect exposure to the oil company already.
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Ally is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Ally Financial and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Discover Financial Services and Occidental Petroleum. The Motley Fool has a disclosure policy.
