For nearly six decades, Berkshire Hathaway CEO Warren Buffett has handily outperformed Wall Street's benchmark index, the S&P 500. Since taking the reins in the mid-1960s, the Oracle of Omaha has practically doubled up the average annual total return, including dividends, of the S&P 500, and overseen a cumulative return in Berkshire's Class A shares (BRK.A) of over 5,310,000%, as of the closing bell on July 26.
Although Buffett isn't infallible, a notable percentage of the 44 stocks in Berkshire Hathaway's $400 billion investment portfolio have increased in value over the long run. Even with the S&P 500 relatively close to its all-time high, some of these holdings remain sensational buys.
What follows are three unstoppable Warren Buffett stocks that make for no-brainer buys in August.
Visa
The first magnificent Buffett stock that makes for a sensational buy in August (and likely well beyond) is leading payment processor Visa (NYSE: V).
Since peaking in March, Visa's stock has hit correction territory and declined by a little over 10%. Selling activity picked up last week, with the company's revenue falling short of Wall Street's consensus forecast for the fiscal third quarter (ended March 31). Though Visa missing sales estimates is a rarity, it's no cause for concern if you have a long-term mindset.
The great thing about financial stocks is that they're cyclical. This is to say that companies like Visa ebb-and-flow with the health of the U.S. and global economy. Even though slowdowns and recessions are a normal and inevitable part of the economic cycle, they don't last long. By comparison, economic expansions typically endure for years, which gives Visa the opportunity to benefit from the natural expansion of consumer and enterprise spending.
To add to this point, Visa's management team has made a concerted effort to steer clear of lending. Despite giving up the potential to collect interest income and annual fees from cardholders, Visa's avoidance of lending ensures it won't have to set aside capital to cover loan losses or credit delinquencies. When recessions do occur, Visa is typically one of the first financial stocks to bounce back.
Visa has an extensive growth runway, as well. On top of being the undisputed leader in credit card network purchasing volume in the U.S., Visa has the opportunity to organically or acquisitively (e.g., its purchase of Visa Europe in 2016) expand its payment infrastructure into faster-growing, but chronically underbanked, emerging markets. Consistent double-digit growth in cross-border payment volume speaks to this sustainable opportunity.
The final piece of the puzzle is that Visa's stock is still relatively cheap. Investors can grab shares right now for 23 times forward-year earnings, which represents a 19% discount to its average forward-year earnings multiple over the trailing-five-year period.
Amazon
A second unstoppable Warren Buffett stock that's begging to be bought in August is none other than e-commerce colossus Amazon (NASDAQ: AMZN).
The biggest headwind for Amazon would be a U.S. or global recession. Since it's one of the stocks responsible for lifting the S&P 500 and Nasdaq Composite to fresh all-time highs, a recession would likely weigh heavily on its share price and dominant e-commerce platform. Thankfully, as I pointed out earlier, recessions resolve fairly quickly.
Although most consumers and investors are familiar with Amazon because of its globally leading online marketplace, e-commerce plays only a small role in its cash flow generation. Amazon's three ancillary operating segments, which have all been consistently growing by a double-digit percentage, are the catalysts that can push its stock, and cash flow, notably higher.
Nothing is more important to Amazon's long-term success than its cloud infrastructure service platform Amazon Web Services (AWS). According to tech analysis company Canalys, AWS accounted for close to a third of all cloud infrastructure service spending to end 2023. Enterprise cloud spending is in its early innings of ramping up, and cloud-service margins are many multiples higher than the margins associated with online retail sales.
Amazon's subscription and advertising services are the other two ancillary segments that continue to deliver phenomenal growth. Amazon becoming the exclusive streaming partner for Thursday Night Football, coupled with winning a long-term (11-year) streaming deal with the National Basketball Association (NBA), gives the company exceptional ad and subscription pricing power.
Believe it or not, Amazon is also inexpensive. While the traditional price-to-earnings (P/E) ratio works great for evaluating mature businesses, price-to-cash-flow tends to be a far better measure of value for high-growth companies that tend to reinvest most of their operating cash flow (like Amazon). After trading at a median year-end price-to-cash-flow ratio of 30 throughout the 2010s, investors can purchase shares of Amazon right now for around 12 times forecast cash flow in 2025.
Sirius XM Holdings
The third unstoppable Warren Buffett stock that makes for a sensational buy in August (and probably well beyond) is satellite-radio operator Sirius XM Holdings (NASDAQ: SIRI).
Whereas Amazon is one of the "Magnificent Seven" stocks responsible for leading the S&P 500 higher, Sirius XM has badly underperformed in a rip-roaring bull market. Its down year likely has to do with concerns that auto sales will weaken in the second-half of 2024. Sirius XM counts on promotional users (new vehicle buyers are occasionally given promotional access to Sirius XM's satellite services for a period of three months) eventually becoming self-pay subscribers. If fewer new vehicles are sold, it could lead a short-lived decline in satellite-radio subscribers.
The good news for current and prospective Sirius XM investors is that the company offers a number of competitive advantages that can make its patient shareholders notably richer.
For one, it's a legal monopoly. As the only licensed satellite-radio operator, Sirius XM enjoys strong subscription pricing power. With Spotify Technology once again increasing the cost of its monthly subscriptions, there's a good chance we'll see Sirius XM follow suit in the months to come.
Even more important than Sirius XM's pricing power is its revenue diversity. Most online and terrestrial radio companies generate the bulk of their sales from advertising. While periods of economic growth are long-lasting, businesses aren't afraid to reduce their advertising budgets at the first sign(s) of trouble. Sirius XM brought in less than 19% of its net sales from ads during the first quarter.
Comparatively, almost 78% of Sirius XM's net sales can be traced to its subscription services. Subscribers are less likely to cancel their service than businesses are to reduce their ad budgets. In other words, a subscription-driven model is going to yield more consistent operating cash flow.
To keep with the theme, Sirius XM Holdings' stock is a bargain. Shares can be had for 11.6 times forecast earnings per share in 2025, which equates to a 36% discount to its forward-year multiple over the last five years.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,059!*
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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of July 29, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon, Sirius XM, and Visa. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Spotify Technology, and Visa. The Motley Fool has a disclosure policy.
3 Unstoppable Warren Buffett Stocks That Make for Sensational Buys in August was originally published by The Motley Fool