Berkshire Hathaway (BRK.A 1.67%) (BRK.B 1.52%) CEO Warren Buffett has made millions for his early investors. A $1,000 investment in Berkshire stock in 1965, when Buffett took control of the company, would have grown to more than $36 million in 2021 if the investor remained invested.
Among Berkshire’s largest holdings, there are a few that stand out for their durable brands and competitive strengths. Kraft Heinz (KHC -0.40%) and American Express (AXP 3.23%) have been in Berkshire’s portfolio for several years. These companies reported healthy growth in 2022 and remain smart buys for 2023 and beyond.
Let’s find out a bit more about these two underrated Buffett- and Berkshire-owned stocks.
1. Kraft Heinz
Buffett loves companies with strong brands that are well-managed and have opportunities to keep allocating capital at attractive rates of return for shareholders. While Kraft Heinz stock underperformed the market over the past five years, the company has found a second wind under CEO Miguel Patricio. Patricio took on the CEO job at the company, which owns the Philadelphia cheese and Jell-O brands, in June 2019.
As financial results improved under the new leadership, the stock is up 5.8% over the past year, outperforming the S&P 500 index’s decline of 13.2%.
Since the third quarter of 2019, adjusted (organic) sales have grown at a compound annual rate of 6.4%. Kraft’s growth accelerated in 2022, with organic sales up 11.6% in the third quarter. This reflects solid demand for the company’s strongest brands, including Lunchables, Heinz, Philadelphia, and Kraft mac and cheese.
While inflation has caused a small decline in its unit volume sales, Kraft has been able to keep sales growing with higher prices. This pricing power is based on the company’s tremendous brand strength, which is exactly why Warren Buffett continues to hold the stock.
These qualities drive predictable sales every year and allow Kraft Heinz to maintain a generous dividend policy. It paid out 55% of its free cash flow last year, bringing the dividend yield to a tasty 4.06% at the current stock price.
The stock is a sweet deal, trading at a forward price-to-earnings (P/E) ratio of 14.5, a significant discount to the average stock’s 20 multiple. Kraft’s pricing power and ability to maintain solid financials in a difficult operating environment could lead to a higher valuation.
2. American Express
Berkshire Hathaway has held stock in the premium card brand since the 1990s. Based on the company’s recent performance, it’s likely to continue to hold the stock for many more years. American Express solidified its position as the top premium credit card provider as it has made progress in attracting younger customers to the brand.
Coming off a record year in 2021, total revenue continued to grow through the third quarter last year, up 24% year over year. With millennials and Gen Z customers as the fastest-growing demographic for the company, American Express is set up for continued success over the long term.
Strong growth has kept the stock afloat better than most lately. It’s down just 13.2% over the past 12 months.
American Express’ strong brand is ultimately based on the company’s business strategy. It attracts new cardholders with exclusive perks, such as special discounts at merchants and reimbursements for travel-related fees. These benefits are funded by charging fees to merchants for accepting American Express cards, which is the largest source of revenue for the company, and a source of its competitive advantage over other card brands.
Because of its large and growing cardholder base, and the high spending tendencies of these affluent cardholders, merchants are willing to pay fees to accept American Express cards.
In the last quarter, Amex added 3.3 million proprietary cards, with Gold and Business Platinum reaching record levels. This bodes well for continued growth in Amex’s merchant network, pointing to more revenue growth over time.
The company’s strong operating results in a challenging economy reflect a widening competitive moat, which explains why Buffett continues to hold the stock. The best part is that American Express is conservatively valued right now, trading at a forward P/E of 14 with a dividend yield of 1.37%.
As with Kraft Heinz, Wall Street is underestimating the long-term value of the American Express brand and its pull on the consumer. This is another Buffett favorite that would make a solid investment for any investor.
American Express is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.