For decades, Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) has captured the attention of investors with its long track record of stellar returns. Since taking over as CEO in 1965, Buffett has consistently delivered an incredible annualized return of 20%. Just imagine, a $100 investment back then would have blossomed into over $5 million today.

Buffett’s keen eye for high-quality companies with competitive moats has made him a beacon of inspiration for investors everywhere. While his successful track record speaks volumes, it’s important to remember that not every investment hits the mark. With that in mind, here are two Buffett stocks that I would scoop up right now, along with one that I’d steer clear of right now.

Buy Berkshire Hathaway
The first stock I’d buy is Buffett’s own Berkshire Hathaway. Investing in Berkshire provides investors with diversification, disciplined capital management, and stellar long-term returns. At its core, Berkshire is a conglomerate of high-quality businesses, including wholly owned subsidiaries like Geico, BNSF Railway, and Berkshire Hathaway Energy, as well as a massive equity portfolio featuring blue chip names like Apple, Coca-Cola, and Visa.

What has set Berkshire apart is its capital management and patience across economic cycles. Buffett and his right-hand man, the late Charlie Munger, achieved a stellar track record of investing in high-quality companies going back 60 years. The company has done so by avoiding fads and investing in durable businesses with strong moats and steady cash flows.

Earlier this year, Warren Buffett announced he was passing the reins of CEO on to Greg Abel. Meanwhile, investing lieutenants Todd Combs and Ted Weschler will help direct Berkshire’s massive investment portfolio.

The company is in a good spot in terms of capital. Its huge cash pile stands at nearly $340 billion, providing it with dry powder for opportunistic purchases during market dislocations. For long-term investors, Berkshire Hathaway is a well-run conglomerate with a ton of cash on hand, leaving it well positioned even in a post-Buffett era.

Buy American Express
The second Buffett stock to buy is American Express (AXP). American Express boasts a strong brand, customer loyalty, and strong credit metrics, making it a solid blue chip stock for long-term investors.

The company operates a closed-loop payments network, unlike Visa or Mastercard which only handle transactions. As a result, American Express captures fees from transactions on its network along with interest-earning loans on those credit card balances. Visa and Mastercard earn swipe fees, but credit card loans are held by banking partners that reap the benefits of interest payments.

While this gives American Express interest income, which can help boost earnings, especially when interest rates rise as they did a few years ago, it also opens the company up to credit risk. If its credit card borrowers fail to repay their balances, it could impact its credit quality and ultimately its earnings.

This is where American Express’ strength becomes evident. The company reduces its credit risk by focusing on a high-spending, high-credit customer base that can be more resilient in economic downturns. As a result, American Express tends to have stellar credit metrics compared to its peers. On top of that, it benefits from growth in travel, luxury spending, and business expenditures as its affluent consumer base helps drive above-average transaction volumes and fee income.

For long-term investors seeking quality, resilience, and consistent shareholder returns, American Express is a compelling stock for your diversified portfolio.

Avoid Ally Financial
One Warren Buffett stock I wouldn’t buy is Ally Financial (ALLY). There is nothing wrong with the company per se, and it could do well if we get interest rate cuts from the Federal Reserve in the coming years. However, the company has some limitations that could hurt its long-term growth prospects.

First, it operates in a highly cyclical business, with over three-quarters of Ally’s revenue coming from automotive lending. This reliance on auto lending makes it sensitive to economic downturns.

During recessions or credit contractions, demand could wane and delinquencies and charge-offs could spike, causing a hit to its profits. This is precisely what happened in recent years, when Ally’s revenue and income dropped off amid the rising interest rate environment of 2022 to 2023.

Additionally, Ally competes in crowded markets, such as automotive lending, digital banking, and investing. It faces competition from banks, like JPMorgan Chase, Bank of America, and Capital One Financial, along with fintech companies like SoFi. It also faces competition in automotive lending from PNC Financial and Upstart, which is gaining a foothold in the space.

Ally could do well in the near term, especially if credit conditions normalize and the Federal Reserve cuts its benchmark interest rate. While the stock is reasonably priced on a forward basis, I don’t see a strong, robust business model with a strong moat, which is why I would avoid this Buffett stock today.

— Courtney Carlsen

Where to Invest $99 [sponsor]
Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.

Source: The Motley Fool