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3 Warren Buffett Stocks to Buy in September

Billy Duberstein, The Motley Fool

Whenever there's considerable macroeconomic uncertainty, even the highest-quality stocks can get thrown into the bargain bin. Even if you don't quite catch the "bottom" in a stock, owning high-quality franchises with sustainable competitive advantages can help you sleep at night, all while holding for the long-term through turbulent times.

That's why it's always a good idea to look at what Warren Buffett, the best long-term investor of all time, is currently buying and holding for the Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) portfolio. Buffett looks for competitively advantaged companies he can understand, then purchases shares when they go on sale with the intention of holding for the long term.

With the stock market undergoing considerable volatility amid the intersection of the China trade war and interest rate concerns, here are three high-quality Buffett stocks to consider for your portfolio in September.

A picture of smiling Warren Buffett.

Image source: The Motley Fool.

Apple

One company right in the middle of trade war controversy is Apple (NASDAQ: AAPL), which is currently Buffett's largest holding. Apple gets around 17% of its business from China, and has a fair amount of its assembly and production in China as well. As such, the ongoing trade war has weighed on Apple's stock despite the company posting stronger-than-expected results last quarter. Apple trades at just 18 times earnings, compared with 22.2 times earnings for the S&P 500. Also embedded in that multiple is over $100 billion in net cash, meaning Apple's business outside of its extra cash actually trades for a lower multiple than that.

There are also a few catalysts in the near and medium term for Apple shareholders to look forward to. This year, the company is releasing four big new services, some of which just hit the market. Apple News+ is its news subscription service for $10 per month, and the tech giant's new credit card just launched in late August. This fall, the company will launch Apple Arcade, a mobile video game service, and Apple TV+, its widely anticipated new streaming TV service.

It looks like there's a fair amount of skepticism that these services may move the needle, as most will be entering established markets with intense competition -- especially the credit card, Arcade, and TV+. However, should any prove to be a big success, Apple's shares could get a boost.

Apple's stock may also be hurt by tepid iPhone sales this year, and, likely, next year as well. However, the fall of 2020 should bring the release of Apple's first 5G phones. That could kick-start a new upgrade cycle for the iPhone, which is still Apple's largest segment.

While the trade war could cause some near-term complications for the iPhone giant, Apple's cheap stock, ample share repurchases, a rising dividend, and a few catalysts on the horizon could make for a great time to pick up some shares of the No. 1-ranked brand in the world for 2019, according to Forbes magazine.

Bank of America

It's also no secret that Buffett loves bank stocks, and his largest bank holding is Bank of America (NYSE: BAC). Buffett came to own Bank of America in the aftermath of the Great Recession, through a preferred stock investment in 2011. The preferred shares came with warrants, which gave Berkshire the option to purchase common shares of Bank of America at $7.14 per share. Buffett swapped his preferred stock for the warrants in mid-2017, once Bank of America's dividend rose above the yield on the preferred stock.

At the time of the swap in 2017, Bank of America's shares were trading at $24.32, not that far below today's price of $27.72.

The past two years haven't been so great for bank stocks, even as Bank of America's earnings per share have risen. Today, the stock trades for an incredible cheap 9.9 times trailing earnings and a price-to-book ratio just over 1. The culprits behind investor skepticism? The same dual concerns of a potential recession and a flattening yield curve, which could compress bank margins in the coming quarters.

However, there's reason to think these fears are a bit overdone. For one thing, the largest U.S. banks have much higher capital ratios and are thus much safer than before the last recession, which was the most severe downturn since the Great Depression. In addition, while interest margin may be a bit of a headwind soon, Bank of America has been investing heavily in technology, cutting a huge amount of non-interest overhead costs out of its business, leading to 18 straight quarters of operating leverage and higher profit margins, even in quarters of negative growth.

Finally, CEO Brian Moynihan recently said he doesn't see a recession looming, and that the U.S. consumer still appears to be doing quite well, according to his data. Apparently, Buffett agrees with him, as the Oracle of Omaha recently ramped up his Bank of America purchases last quarter, taking Berkshire's holdings to over a 10% stake in the bank, showing high confidence in BofA's future.

Amazon

While the previous two stocks are among Buffett's favorites, a somewhat surprising and recent addition to Berkshire's portfolio is a smaller stake in Amazon (NASDAQ: AMZN), which was purchased by one of Buffett's two younger lieutenants, Todd Combs or Ted Wechsler. The Amazon stake was initially purchased in the first quarter of 2019, and then increased in the second quarter.

Amazon is an atypical Buffett stock in one sense, as it doesn't seem cheap by conventional metrics, such as price-to-earnings (P/E) ratios. However, Amazon does fit the Buffett model of compounding growth with a formidable moat.

Amazon has become the dominant leader in e-commerce over the past 25 years by putting customers first and reinvesting its profits into lower prices, greater variety, and faster shipping. The company actually just commenced the next step in that journey, upgrading Prime customers from two-day to one-day shipping, leading to a reacceleration in its e-commerce sales.

Yet it's not just about Amazon's near-50% market share of U.S. e-commerce sales that's so impressive, but rather, what Amazon's leaders under CEO Jeff Bezos have done with it. In a quite ingenious turn, Amazon management leveraged that massively scaled, yet low-margin, e-commerce platform to incubate multiple new businesses with high profit margins and outstanding economics.

For instance, in developing the tech infrastructure to support its massive operations, Amazon eventually realized it could rent out excess capacity in its data centers to other businesses. Years later, Amazon Web Services is a $30 billion run-rate business, growing nearly 40%, with operating margins in the high-20% range.

Amazon has also recruited third-party sellers to sell through the company's huge platform. This business is much higher margin for Amazon because it doesn't take on inventory but merely collects a fee for fulfillment and shipping.

Amazon has also grown a relatively new online advertising business, a highly attractive outlet for brands since Amazon's site is closer to the point of purchase than a typical search engine or social media platform. Amazon's digital ad sales grew 37% last quarter to over $3 billion, on the way to over $10 billion-plus in 2019, according to one analyst estimate. And more recently, Amazon introduced Shipping with Amazon, whereby Amazon will deliver packages for third parties through its own logistics infrastructure, which it had initially built out to support the busy holiday season.

All of these third-party businesses are high-growth, highly profitable, and strengthened by Amazon's massive economies of scale, making them hard to displace. This is likely what attracted Combs or Wechsler to the stock. With Amazon trading well below its all-time highs set about a year ago, now may also be a good time to look at the e-commerce leader.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Billy Duberstein owns shares of Amazon, Apple, Bank of America, and Berkshire Hathaway (B shares) and has the following options: short September 2019 $24 puts on Bank of America and short September 2019 $160 puts on Apple. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com