Warren Buffett famously told Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders that “when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” That said, he rarely finds a business so outstanding that he ends up never selling.
He clarified his position in his 2016 letter to shareholders: “It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.”
But Buffett came close to making that commitment to shareholders in his most recent letter for a handful of companies he finds unparalleled in their industries. He plans to maintain Berkshire’s investments in these businesses “indefinitely,” he says.
Here are three stocks Buffett plans to hold forever that still look like great buys today.
1. Coca-Cola
Buffett first bought shares of Coca-Cola (NYSE: KO) for Berkshire Hathaway in 1988 and added to them in 1989. Coca-Cola was one of the companies Buffett was referring to when he originally made his statement about Berkshire’s favorite holding period.
One of the biggest factors in Buffett’s investment process is identifying companies with wide economic moats -- a sustainable competitive advantages. A wide moat allows a company to produce strong gross margins. Coca-Cola’s moat stems from its strong brand and the cost-advantages afforded by its scale.
The strength of its brand shows up in Coca-Cola’s ability over the past few years to pass on the costs of inflation to customers. The company’s 12% organic revenue growth in 2023 was driven by a 10% increase in pricing and channel mix shift, and above the core inflation rates across most of its markets.
Coca-Cola’s global scale is another reason Buffett loves the company. Coca-Cola products are sold around the world, which puts Coke in a position to maximize the efficiency of its supply chain. What’s more, distribution deals for existing products make it easy for the company to introduce new products. As a result, Coca-Cola can increase its already dominant share of the markets in which it participates.
While Buffett doesn’t plan on adding to his Coca-Cola position in 2024, the stock still looks attractive at today’s price. Shares trade for a forward price-to-earnings (P/E) ratio of 21.7, which is roughly in line with the S&P 500. But Buffett would describe the prospects for Coca-Cola as “better than the average American corporation.” Indeed, investors should expect steady revenue growth (even after adjusting for inflation) and continued margin expansion for the foreseeable future.
2. American Express
American Express (NYSE: AXP) is another long-time Buffett holding. He built a sizable position in the company for Berkshire’s portfolio during the first half of the 1990s.
What makes American Express different from other credit card issuers is that it owns the payment network used by its cards. Bank issuers rely on third-party payment networks to process payments every time someone swipes, dips, taps, or types in their credit card details online. The payment networks take a significant cut for providing their services. But American Express gets to keep that for itself.
Nearly 80% of American Express' net revenue comes from payment processing and card fees, although interest on loans is a growing source of revenue. As a result, American Express could see growth slow in an economic downturn that reduces consumer spending, but it won’t see as big an effect from loan defaults as other issuers.
Amex sees strong growth in the years to come. Its long-term outlook calls for double-digit percentage revenue growth with earnings growing in the mid-teens. It expects to hit those marks this year with about 10% revenue growth and 15% earnings-per-share (EPS) growth. With the shares trading at a forward P/E ratio of 17.7, the shares look like a great value relative to the growth outlook for the business.
3. Occidental Petroleum
The last stock Buffett mentions as one Berkshire plans to hold indefinitely is Occidental Petroleum (NYSE: OXY). It's a relative newcomer to Berkshire’s portfolio. Buffett established a position in Occidental in 2019 by buying $10 billion worth of preferred shares to fund the oil company’s acquisition of Anadarko. In 2022, he started accumulating shares of the common stock, and Berkshire now owns 28% of the shares outstanding. Buffett has continued adding to Berkshire's position in 2024.
Occidental’s position in the Permian Basin gives it a vast amount of oil production capacity at low prices. That said, it’s spent heavily to establish that position, taking on huge amounts of debt, and putting pressure on its balance sheet. To that end, management plans to sell off non-core assets to pay down debt, a playbook it's run throughout its recent history.
Since Occidental generates most of its revenue from oil production instead of refining and processing like other integrated oil and gas companies, it’s much more susceptible to swings in oil prices. Chief Executive Officer Vicki Hollub, for whom Buffett has expressed much admiration, is extremely bullish on the price of oil. So far, her bets have worked out well, with West Texas Crude future prices climbing 18% through the first three months of the year.
That also makes Occidental a bit riskier than other oil and gas companies. But with the shares trading at a forward P/E ratio of 17.9 and an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 6, the shares are trading at a fair value. If Hollub’s thesis on oil prices plays out over the next couple of years, it could turn out to be a great value.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
3 Stocks Warren Buffett Plans to Hold Forever That Still Look Like Great Buys Today was originally published by The Motley Fool
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