For nearly six decades, Warren Buffett has been running circles around Wall Street. Since taking over as Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) CEO in the mid-1960s, he's overseen an aggregate return in his company's Class A shares (BRK.A) of more than 5,510,000%, as of the closing bell on Dec. 20. Big returns are an easy way to get noticed on Wall Street.
Something else investors have come to appreciate is the Oracle of Omaha's willingness to share the characteristics he looks for in businesses when putting Berkshire's capital to work.
However, Buffett's unwavering optimism has been put to the test over the last couple of years. Although the $297 billion investment portfolio he oversees at Berkshire Hathaway still contains bargains, finding value is becoming tougher in a historically pricey stock market.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett has sent a $166 billion warning to Wall Street
While Buffett has said that investors shouldn't bet against America, his short-term actions don't always line up with his long-term message. Case in point: He and his top advisors, Todd Combs and Ted Weschler, have been net sellers of equities in each of the last eight quarters, with cumulative stock sales outpacing purchases by $166 billion.
Even though Buffett is a long-term investor, he's first and foremost a value seeker. He won't buy shares of a company if he doesn't feel he's getting a good deal. At the moment, finding a good deal is incredibly difficult.
While there are a number of ways for investors to measure value, the one that conclusively shows that the stock market is exceptionally pricey is the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio).
Whereas the traditional P/E ratio, which divides a company's share price into its trailing-12-month earnings, can be tripped up by economic shocks, the Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years. Taking a step back and looking at a decade's worth of earnings history smooths out the effect of shock events and makes for the closest thing you'll get to an apples-to-apples valuation comparison.
As of the close of trading on Dec. 20, the S&P 500's Shiller P/E Ratio was 37.68, or more than double its average reading of 17.19, when back-tested to January 1871.
Even more worrisome: We recently witnessed the third-highest reading during a continuous bull market dating back 153 years. Each time the Shiller P/E has previously topped 30 during a bull market, it's eventually been followed by a decline ranging from 20% to 89% in Wall Street's major stock indexes.
Three Warren Buffett stocks make for no-brainer buys in the new year
Just because the stock market is historically pricey, it doesn't mean you can't find a bargain or three lurking in Berkshire Hathaway's portfolio. The following three Warren Buffett stocks can be bought with confidence as we march toward the new year.
Image source: Getty Images.
Sirius XM Holdings
The first Buffett stock that makes for a no-brainer buy in 2025 is one of the very few stocks the Oracle of Omaha has been purchasing of late: Satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI).
Sirius XM has had an eventful year, with the company merging its shares with Liberty Media's tracking stock, Liberty Sirius XM Group, in September. Liberty Sirius XM Group shares never tracked the performance of Sirius XM's stock all that closely, which resulted in perceived arbitrage opportunities and confusion for investors.
Additionally, Sirius XM completed a 1-for-10 reverse stock split following the consummation of its merger. Whereas most companies conducting reverse splits do so to avoid delisting from a major stock exchange, Sirius XM's reverse split appears to be solely intended to get its shares back on the radar of institutional investors.
One of the reasons Sirius XM makes for a potential slam-dunk investment in 2025 (and beyond) is because it's a legal monopoly. Although it's still fighting with traditional radio stations for listeners, there isn't another licensed satellite-radio operator. This distinction affords the company substantial subscription pricing power, more often than not.
Another catalyst that should inspire confidence for investors is how Sirius XM generates revenue. Most terrestrial and online radio operators generate the bulk of their sales from advertising, which works well when the U.S. economy is expanding but can lead to serious worries during downturns.
In comparison, less than 20% of Sirius XM's net sales come from advertising. The lion's share of sales (close to 77% of net sales through the first nine months of 2024) can be traced to subscriptions. The beauty of a primarily subscription-driven model is that users are less likely to cancel during periods of economic turbulence than advertisers are to reduce their spending. In other words, Sirius XM is ideally positioned to thrive in pretty much any economic climate.
Lastly, there's a phenomenal value proposition with Sirius XM. Shares can be scooped up ahead of 2025 for less than 8 times forecast earnings in the upcoming year. This is just a stone's throw away from Sirius XM's lowest forward P/E multiple in its 30 years as a publicly traded company.
Visa and Mastercard
The other two Warren Buffett stocks that make for no-brainer buys -- even in a pricey stock market -- are payment-processing goliaths Visa(NYSE: V) and Mastercard(NYSE: MA). These two companies are being discussed together since they possess virtually identical catalysts.
There's not a sector the Oracle of Omaha loves putting Berkshire Hathaway's cash to work in more than financials -- and there's a logical reason behind this. Financial stocks are cyclical, which means they ebb and flow with the health of the U.S. and/or global economy. What Buffett and his top aides realized a long time ago is that economic cycles aren't linear.
Since World War II ended 79 years ago, the U.S. has navigated its way through a dozen recessions. Over that time, nine out of 12 recessions resolved in less than a year, while the remaining three endured no more than 18 months. Conversely, there have been two periods of growth that surpassed a decade in length. Disproportionately long periods of growth allow financially focused businesses like Visa and Mastercard to thrive.
Another reason investors can trust Visa and Mastercard to deliver in virtually any economic climate is because their respective management teams have shied away from lending. During periods of economic turbulence, lenders usually have to set aside capital to cover credit delinquencies and loan losses. Without any direct exposure to lending, neither Visa nor Mastercard have to set aside their capital. In short, they can bounce back from recessions faster than most lending institutions.
Both companies also have a sustained double-digit growth opportunity at their proverbial fingertips. Growth in cross-border payment volume has remained in the double digits for Visa and Mastercard. Furthermore, both have the operating cash flow and deep pockets necessary to organically or acquisitively enter emerging markets.
The final piece of the puzzle is that Visa and Mastercard are still fundamentally attractive. Visa's forward P/E ratio of 25 is roughly 12% below its average forward-earnings multiple over the trailing five-year period. Meanwhile, Mastercard is trading at 4% below its average forward P/E over the last five years, but it offers a faster earnings-growth rate than Visa.
Both look to be rock-solid buys for the new year, and well beyond.
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Sean Williams has positions in Mastercard, Sirius XM, and Visa. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
