We recently compiled a list of the Warren Buffett and Hedge Funds Are Crazy About These 10 Stocks. In this article, we are going to take a look at where American Express Company (NYSE:AXP) stands against the other stocks recommended by Warren Buffett and hedge funds.
Warren Buffett will go down in history as one of the most successful investors on Wall Street, a feat achieved through integrity, wisdom and wit. He is dubbed the Oracle of Omaha on his investment firm Berkshire Hathaway, delivering a compounded annual gain of 19.8% since 1958, more than double an increase of 9.9% for the S&P 500. Berkshire Hathaway stock has gained over 3,787,464% since 1965 compared to a 24,708% gain for the S&P 500, underlining Buffett’s stock-picking skills.
Buffett is one of the most accomplished investors in the history of Wall Street having amassed a wealth of $138 billion, as reported by Bloomberg’s Billionaire Index. His net worth could have been much more had he not made generous contributions to various charitable organizations. In contrast to many other billionaires who prefer lavish lifestyles in large homes and luxury vehicles, Buffett is often seen as one of the most humble billionaires globally.
The significant investment gains over the years stem from Buffett buying stocks in various sectors and holding them for years and even decades. Buffett’s secret to prosperity mainly lies in investing in well-established, reputable companies with clear competitive edges. Although this approach focuses heavily on undervalued stocks, it also occasionally includes investments in high-growth companies.
The investment strategy is often backed by the massive cash haul that Berkshire Hathaway holds on generating earnings per share on most of its investments and through dividend payments. Nevertheless, it is becoming increasingly clear that Warren Buffett and hedge funds are crazy about a particular clique of stocks.
High-growth companies and market leaders in respective fields are some of the factors that Buffett and most hedge funds closely watch while selecting stocks. Technology stocks which consist of some of the biggest companies account for 41% of Buffett’s 13F portfolio at the end of March, an edge that has always allowed him to outperform the overall market.
Diversification is another important factor in the top stocks that Warren Buffett and hedge funds are crazy about. While technology stocks account for the biggest share, the billionaire investor is also heavily invested in Financials at 21% and Basic Material at 10.7%. Diversifying aligns with the billionaire investor value investing principles that involve pursuing undervalued investments in various sectors.
Over the years, Buffett has always sought securities whose prices are undervalued relative to their intrinsic value. Rather than focusing on short-term gains in the market, the Berkshire Hathaway chief selects stocks based on their long-term potential. It was one of the reasons that Berkshire Hathaway shares ended 2023 with a 15.8% gain, representing an eighth straight year of advances. Its biggest increase of 29.6% came in 2021 at the height of the COVID-19 pandemic.
While Berkshire Hathaway had $189 billion in cash as of the end of the first quarter, the cash haul is expected to surge to $300 billion by the end of the third quarter. While most people might wonder why Buffett is not putting much of the cash to work, the billionaire investor is always cautious focusing on value investments rather than just investing for the sake.
The billionaire investor is always driven by the mantra: never invest in overvalued equities. Therefore he always takes time scanning for value investments trading at discounted valuations. Additionally, the sheer size of Berkshire Hathaway means it can only put its money into a select few companies that will significantly impact its returns. This is further compounded by the fact that investments in cash equivalents, such as short-term government bonds, are currently offering returns above 5% which is quite high at current levels. As a result, Warren Buffett and his firm are deliberately seeking the perfect investment at the perfect price, and this opportunity could arise at any moment.
In the recent past, Buffett has also gone against the wave amid a shift of focus from oil and gas investment plays amid the transition to clean energy. Buffett remains bullish about investment opportunities in the energy sector amid the carbon care initiatives even as the biggest players continue generating significant returns from the lucrative fossil fuel business. Buffett and hedge funds have also taken keen interest in stocks offering exposure to emerging technologies such as Artificial Intelligence that are driving valuations higher in the market.
Our Methodology
In this article, we take a look at some of the top stocks in which Buffett and other hedge funds are heavily invested. Warren Buffett and hedge funds are crazy about these 10 stocks partly because of their growth metrics and long-term prospects. While some of the stocks are trading at a premium valuation, they are market leaders in their respective fields and, therefore, well-positioned to generate long-term value. We have ranked the stocks in Warren Buffett’s portfolio based on the number of hedge funds invested and selected the top 10.
A close-up view of a payment terminal, capturing the sophistication of a payment network.
American Express Company (NYSE:AXP)
Berkshire Hathaway’s Stake Value: $34.52 Billion
Number of Hedge Fund Investors: 66
American Express Company (NYSE:AXP) is one of the world’s largest credit card companies and payment networks and one of the top stocks that Warren Buffett and hedge funds are crazy about, owing to its impressive track record in dividend payments. In contrast to most credit card providers that handle credit card payments through external networks, American Express Company (NYSE:AXP) handles these transactions directly through its system.
With every credit card transaction, this setup enables American Express Company (NYSE:AXP) to achieve better financial returns than its competitors. The firm keeps a portion of this benefit through increased profit margins and uses the remaining portion to improve customer benefits and services.
Here is what Artisan Select Equity Fund said about American Express Company (NYSE:AXP), in its first quarter 2024 investor letter:
“American Express Company (NYSE:AXP) shares rose 22% this quarter. This is an interesting case study, given our earlier discussion about inflation. American Express operates one of the largest credit card networks in the world. Its revenue is primarily a function of a fee rate applied to the dollar value of goods and services that are transacted through its network. That dollar value is, of course, nominal. As inflation pushes up the value of those goods and services as it has for the past few years, American Express will capture that value through its fee structure. The past few years’ inflation has clearly been a benefit. Aside from its inherent inflation protection, the business is a very strong one. Payments continue to shift toward electronic forms, benefiting American Express. It also has a strong brand that attracts loyal and highly profitable customers that are the envy of the industry. Recent results have been strong with revenues moving nicely ahead of GDP.
While Berkshire owns $34.52 billion worth of stakes in American Express Company (NYSE:AXP), out of the more than 900 hedge funds tracked by Insider Monkey, 66 hedge funds reported owning stakes.”
Overall AXP ranks 10th on our list of the best stocks to buy according to Warren Buffett and hedge funds. You can visit Warren Buffett and Hedge Funds Are Crazy About These 10 Stocks to see the other stocks that are on hedge funds’ radar. While we acknowledge the potential of AXP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AXP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.