3 Warren Buffett Stocks to Buy and Hold Forever

Key Concepts

• Forever Stocks: Companies that Berkshire Hathaway expects to own indefinitely, potentially beyond Warren Buffett's tenure as CEO, due to their fundamental strength, global reach, and essential nature.
• Economic Moat: A sustainable competitive advantage that protects a company's long-term profits and market share from competitors.
• Closed-Loop Network: A business model, exemplified by American Express, where a single entity manages credit card issuance, payment network operation, and merchant relationships, capturing the full economic profit from transactions.
• Deleveraging: The process of reducing a company's debt burden, typically by paying off existing debts or selling assets.
• Fair Value Estimates: An analyst's assessment of a stock's intrinsic worth, used as a benchmark for investment decisions.
• Topline Growth: An increase in a company's gross revenue or sales.
• Share Repurchases and Dividends: Methods by which companies return capital to shareholders.

Berkshire Hathaway's Evolving Investment Strategy and "Forever Stocks"

The Morning Filter podcast, co-hosted by Susan Javinsky, discussed Berkshire Hathaway's recent investment activities and its philosophy regarding long-term holdings, particularly "forever stocks." Berkshire Hathaway recently made a significant $4.3 billion investment in Alphabet, a move that surprised many observers given Warren Buffett's historical reluctance towards tech investments. Buffett has previously categorized Apple, another top holding, as a consumer stock rather than a technology play. Despite this, Alphabet's inclusion among Berkshire's top 10 holdings suggests Buffett's approval. The discussion then shifted to the criteria that define a "forever stock" for Berkshire Hathaway.

Criteria for "Forever Stocks"

Warren Buffett defines "forever stocks" as companies that provide comfort due to their immense success in their core businesses. These companies offer products and services that "travel," meaning they have established themselves as worldwide brands and essential components of daily life. Investors are advised to keep these stocks on a watch list and consider purchasing them when their market price falls below Morningstar's fair value estimates.

Forever Stock 1: Coca-Cola (KO)

Coca-Cola is highlighted as a quintessential Warren Buffett investment and the first "forever stock" in Berkshire's portfolio, with Berkshire owning approximately 9% of its outstanding shares.

• Economic Moat: Coca-Cola possesses a wide economic moat, built upon its iconic brands, a deeply loyal customer base, and significant cost advantages in beverage production and distribution.
• Market Dominance: The company dominates the carbonated soft drink market, which ensures predictable cash flows.
• Financial Health: Coca-Cola's management team has maintained a robust balance sheet capable of withstanding economic downturns and has made strategic investments to drive topline growth.
• Shareholder Returns: The company consistently returns cash to shareholders through share repurchases and dividends.
• Fair Value: Morningstar estimates Coca-Cola stock to be worth $74 per share.

Forever Stock 2: American Express (AXP)

American Express is the second stock Berkshire plans to hold indefinitely, with Berkshire owning over 20% of the company's stock.

• Economic Moat: American Express has established a wide economic moat through its unique "closed-loop network." This model means the company issues credit cards, operates the payment network, and maintains a direct relationship with merchants.
• Profit Capture: This integrated approach allows American Express to capture the full economic profit from each credit card payment, making it less reliant on net interest income compared to its competitors.
• Market Position: The company holds an enviable and strong financial position, particularly with small and midsize businesses in America.

Forever Stock 3: Occidental Petroleum (OXY)

Occidental Petroleum is the final "forever stock" discussed in Berkshire Hathaway's publicly traded portfolio, with Berkshire owning more than 26% of its outstanding shares. Occidental is one of the world's largest independent oil and gas producers.

• Economic Moat (Morningstar's View): Morningstar does not believe Occidental Petroleum currently possesses an economic moat, primarily due to the expensive acquisition of Anadarko Petroleum in 2019.
• Management Actions: Despite the lack of a moat, management has been actively deleveraging the company's balance sheet, leading to a significantly improved financial outlook compared to previous years.
• Further Deleveraging: The company's sale of Oxym to Berkshire Hathaway is expected to further aid its deleveraging efforts.
• Fair Value: Morningstar estimates Occidental Petroleum stock to be worth $64 per share.

Conclusion

Berkshire Hathaway's investment strategy, particularly concerning its "forever stocks," emphasizes companies with strong foundational businesses, global brand recognition, and essential products or services. While recent investments like Alphabet show a slight evolution, the core philosophy remains centered on long-term value and financial resilience. Coca-Cola and American Express exemplify companies with wide economic moats and consistent performance, while Occidental Petroleum represents a turnaround story with management actively improving its financial health through deleveraging. Investors are encouraged to consider these stocks for long-term watch lists, buying when they trade below their fair value estimates.