2 Warren Buffett Stocks to Buy Fist and 1 to Avoid

Warren Buffett’s success as an investor means that the stock portfolio within Berkshire Hathaway attract a lot of attention While you should always make your own buy and sell calls, there are a couple of interesting stocks within Buffett’s investment vehicle worth thinking about today. The list includes Chevron (NYSE: CVX), Coke (NYSE: KO)i American Express (NYSE:AXP). Here’s which ones are probably worth buying and which ones you might want to avoid.

Chevron is one of the largest integrated companies in the world energy companies. This means that their business spans the entire spectrum of the sector, from upstream (oil and natural gas production) to midstream (oil pipelines) and downstream (chemicals and refining). This provides some balance to the company’s financial results, as each segment of the industry operates slightly differently.

The bottom line is that for an energy company, Chevron’s peaks and valleys aren’t as extreme as they would be if it only operated upstream. This makes it a solid choice for long-term investors looking to invest in the energy sector.

Helping things is one of the strongest balance sheets in the sector, with a very low gearing ratio of 0.17x.

The real draw right now is the dividend. For starters, the yield is 4.3%. And that performance is backed by a dividend that has increased annually for more than three decades. That said, the average yield for the energy sector is around 3.3%, which hints at the lagging performance Chevron is experiencing right now.

Part of that is related to an acquisition that isn’t going as well as expected. Some are tied to Chevron’s lackluster business results in the face of low energy prices. However, if you have a long-term investment horizon, it’s probably worth buying today. Picking up an above-average industry return while you wait for better days isn’t exactly a terrible thing.

Coca-Cola is one of the most recognized companies in the world and is usually a fairly expensive stock to buy. But a recent drop in prices has brought the stock into an attractive range, assuming you don’t mind paying a fair price for a great company.

To provide some numbers, this Dividend King’s dividend yield is about 3.2%. That’s about halfway over the last decade, implying a reasonable price. Supporting that view are more traditional valuation metrics, such as price-to-sales and price-to-earnings, both of which are slightly below their five-year averages. While it wouldn’t be fair to suggest that Coca-Cola is a bargain buy, it seems reasonably priced.

The real story, though, is what you get for that price. Coca-Cola’s business has solid margins, a healthy balance sheet, and a portfolio of beverage brands that can’t be beat (thanks in large part to its namesake soda). While investors may have some concerns about inflationary pressures, new weight-loss drugs and even increased scrutiny of snacks, given the long and successful history here, it seems very likely that Coca-Cola will remain an industry leader. And that suggests the dividend will continue to be paid and continue to grow over time, exactly what a conservative income investor wants to see.

American Express is a payment processor focused on high-end consumers. This is a strong area, as wealthy clients tend to weather economic downturns relatively quickly. In fact, the fees charged by the company for processing transactions are usually quite reliable over time.

All in all, American Express is an attractive business. But as Benjamin Graham, the man who helped train Warren Buffett, said, a great company can be a bad investment if you pay too much for it.

After roughly doubling in price in about a year, American Express is starting to look expensive. The company’s price-to-sales, price-to-earnings, price-to-cash flow and price-to-book ratios are well above their five-year averages.

If you’re a more active investor who cares about valuation, you might want to take some profit here. It would be understandable if long-term investors would want to stay, given the underlying business, but new investors should probably stay on the sidelines until there is a better entry point.

Even Warren Buffett, the Oracle of Omaha, makes mistakes. So you have to take Berkshire Hathaway’s portfolio with a grain of salt. You also have to remember that Buffett tends to buy and hold, so the things in his portfolio today may not be things he would buy today.

But if you’re looking for some investment ideas, a look at Buffett’s stock list today raises interesting questions about Chevron, Coca-Cola and American Express. The first two look like buys, but the last one seems a bit overpriced right now.

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American Express is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has one disclosure policy.

2 Warren Buffett Stocks to Buy Fist and 1 to Avoid was originally published by The Motley Fool

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