Legendary investor Warren Buffett owns some fantastic stocks. Apple, Coca-Cola, and Johnson & Johnson are some good examples. All three have been excellent investments over the long term.
Currently, I own a number of Buffett stocks in my own portfolio. Yet there are two I’m really bullish on right now. I think there’s a decent chance these shares will make me money this year (and beyond).
My two stock picks
I like to think of these businesses as the ‘plumbing’ of the world’s financial system. Neither of them issue credit or debit cards. Instead, they operate massive global payments networks. These networks allow consumers and businesses to make transactions and move money safely and efficiently.
According to regulatory filings, Buffett has around $3.3bn invested in the two stocks.
Why I’m bullish
There are a number of reasons I’m bullish on these Buffett stocks right now. One is that they’re an inflation hedge.
These companies take a cut of every transaction made on their networks. So as prices rise, so do their revenues. For 2023, analysts expect Mastercard’s revenues to climb to around $25bn, up from an estimated $22.2bn in 2022.
Another is that they’re benefitting from the return of travel. Both Visa and Mastercard generate a large chunk of their revenues from cross-border spending. According to the Economist Intelligence Unit, global tourism arrivals will increase by 30% year on year in 2023. This should give revenues a boost.
I also think the two companies could benefit as consumers feel the pinch from the cost-of-living crisis and turn to credit cards. It’s worth noting that here in the UK, credit card borrowing in November soared to its highest monthly level since 2004 amid mounting financial pressure on households.
Finally, both stocks look attractive from a trend perspective. Between mid-2021 and late 2022, the share prices of both companies trended down. However, recently, both stocks have moved higher and broken out of their downtrends. This is very encouraging, to my mind.
Now of course, there’s no guarantee these stocks will make me money in 2023. As always, there are risks that could hurt my investment thesis.
One is a deep recession. In this scenario, we may see consumers really cut back on spending (including travel). This could hit these payments firms’ revenues.
Another risk is weak sentiment towards stocks with higher valuations. Currently, both Mastercard and Visa have above-average price-to-earnings (P/E) ratios. The former trades at 31 times 2023’s estimated earnings while the latter trades at 27 times forecast earnings for the year ending 30 September 2023.
I don’t see these valuations as particularly high given the companies’ competitive advantages, but they do add some risk.
Overall though, I like the risk/reward set-up here. If I didn’t already have large positions in each (both are top 10 holdings in my portfolio right now), I’d be buying these Buffett stocks now.