Is it best to stay away from equity markets right now, given the significant uncertainty created by the recent U.S. midterm elections? Some might think so. After all, stocks fell significantly following the elections. However, it’s important for investors not to focus too much on short-term volatility. That’s a core investing principle that Warren Buffett, arguably the greatest investor of all time, has stressed time and time again.
In times like this, it’s important to stay the course and look for stocks to buy that are worth holding onto forever. Let’s consider two stocks Warren Buffett loves that fit the bill: Alphabet (GOOG) (GOOGL) and Coca-Cola (KO).
1. Alphabet
While Warren Buffett has historically avoided tech stocks, he made an exception last year when he engineered Berkshire Hathaway’s (BRKA) (BRKB) investment in Alphabet. Since that initial investment, the conglomerate has bought additional shares. Clearly, Buffett and other leaders at Berkshire Hathaway are bullish on Alphabet’s prospects, and with good reason. The tech leader has many qualities that Buffett loves.
One of the most important is its wide moat — something every company that performs well over long periods tends to have. Alphabet’s moat stems from its data flywheel. The company’s leading search engine, Google, enables it to collect massive amounts of data on search preferences, which helps it improve results and boost search volume.
Alphabet’s advertising business still generates most of its revenue, but the company’s cloud computing segment, Google Cloud, has been growing much faster in recent quarters. In the third quarter, Alphabet’s total revenue increased by 25% year over year to $127.6 billion.
Cloud revenue jumped 103% year over year to $30.7 billion. The company’s earnings per share dropped 26% year over year to $2.12, while its free cash flow was a negative $9.1 billion, versus a positive $24.5 billion in the year-ago period. Alphabet is doubling down on its artificial intelligence (AI)-related investments, which partly explains the significant decline in free cash flow.
Some investors are worried that these investments might not pay off. But considering Alphabet’s strength in the cloud industry — particularly in offering AI-related services — my view is that the tech giant’s investments are justified. Further, the cloud industry remains underpenetrated, providing the company with a massive long-term tailwind.
Lastly, Alphabet has other attractive opportunities, including in the streaming and self-driving vehicle industries. The stock is currently down 9% year-to-date, but investors who purchase Alphabet’s shares now and hold them over the long term could be handsomely rewarded.
2. Coca-Cola
Coca-Cola has been in Berkshire Hathaway’s public equity portfolio for decades, and it will likely remain there for much longer. The beverage leader checks a lot of the boxes on Buffett’s list. First, it is a fairly easy business to understand. Coca-Cola manufactures and markets beverages across several categories.
Simple. Second, Coca-Cola boasts a wide moat that stems from its brand name. The Coca-Cola brand and logo are arguably among the most recognizable in the world. This grants the company several advantages. Not only can it command valuable shelf space in grocery stores — something that’s difficult for newcomers to pull off — but the brand also practically sells itself at this point.
Third, Coca-Cola generates consistent earnings and cash flow. Even when the economy isn’t doing particularly well, this is a highly defensive business that tends to outperform most. Last but not least, Coca-Cola is a fantastic dividend stock. It has raised its payouts for 64 consecutive years, making it a Dividend King, a company with 50 or more consecutive annual dividend increases.
Coca-Cola has crushed broader equities this year, and even though it fell sharply shortly after the elections, it has mostly recovered. Still, even at current levels, the stock is worth buying and holding onto forever.
— Prosper Junior Bakiny
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Source: The Motley Fool
