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Best Buy: Berkshire, Mastercard, or Bank of America?

Jason Hall, The Motley Fool

Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B)Mastercard Inc (NYSE: MA), and Bank of America Corp (NYSE: BAC) are three very large companies that share some characteristics that make them attractive to investors. There's certainly a case to be made for all three. As a matter of fact, I own them all, and may buy more shares of each of them in the future.

But there are things, in particular, that make Mastercard and Bank of America very compelling today, and two things that keep Berkshire from being in the running -- at least right now. 

A hand draws a sketch of a scale with price on one side and value on the other

Image source: Getty Images.

Here's why Berkshire Hathaway comes up short

CEO Warren Buffett's hand at both leading the company and investing its profits has made it one of the best wealth-building investments anyone could have owned over the past half-decade. But there are a few things that keep it from being my top pick from this group.

To start, Berkshire is going to find it impossible to replace Warren Buffett when he eventually steps aside as CEO and its most important capital allocator. Don't get me wrong -- I'm not calling the end for the Oracle of Omaha. But at age 87, Buffett won't hold the reins forever, and counting on the company's new leaders to match Berkshire's returns under Buffett is unreasonable. At the same time, I have some concerns that several important Berkshire businesses are at risk of disruption, and even Buffett might miss it. 

Photo of a scale with money on both sides.

Image source: Getty Images.

Portfolio managers Ted Weschler and Todd Combs have shown great skill so far, but Buffett continues to fire the "elephant gun" and bag Berkshire's biggest investments. Expecting them to find another BNSF Railways or Coca-Cola is too much to ask. 

Furthermore, Berkshire shares trade for 24 times earnings and almost 1.5 times book value, a good bit more expensive than they've been in several years. Considering the premium its stock trades for, and more moderate expectations for the company going forward, Berkshire comes up a bit short right now. 

B of A is the best bargain, but falls short of Mastercard on one thing

Of the three stocks featured in this analysis, Bank of America is certainly the best bargain. At 1.1 times book value, it's easily the cheapest of the big U.S. banks, and at 15.3 times earnings, it's in the middle of the pack and very reasonably priced.

The best thing about B of A right now isn't that it's cheap -- it's that the business is stronger and more profitable. Under CEO Brian Moynihan, the bank has taken steps to strengthen its business, reduce expenses, and lower its risk profile. This is starting to pay off on the bottom line, with returns improving and losses falling. Bank of America has improved so much that it's even become one of Warren Buffett's favorite banks.

There's more, too. Higher interest rates and the potential for a lower corporate tax rate could boost profits sharply, and that could make today's price look like bank robbery in another few years. Bank of America is the best bargain of the three, and has good prospects for the years ahead.

The one thing that sets Mastercard apart

At 35 times earnings, Mastercard's stock is more pricey than Berkshire or Bank of America. That might be enough to scare away other investors, but the underlying reason why Mastercard is selling for such a strong premium makes it incredibly compelling today. 

Smartphone user placing online food order.

Image source: Getty Images.

Between now and 2040, the global population is expected to grow by nearly 2 billion people and approach 9 billion. The majority of those people will be middle class, and live in cities. At the same time, technology and global infrastructure investments are putting more technology in the hands of the world's population -- and this technology is already driving big growth in electronic payments, which is Mastercard's business. 

Think about this: On a global basis, electronic payments barely make up more than 10% of transactions. The trend of more urban, middle-class dwellers, combined with mobile payments and other new technologies, is unlocking that growth. Mastercard already has a big head start as a globally recognizable brand and a trusted partner for merchants and financial institutions, but the prospects are simply enormous. 

Management isn't sitting back and waiting on growth, either, but is steadily investing in expanding its capabilities and using technology to take more market share all around the world. The company may not be able to continue generating 18% revenue growth and 24% earnings-per-share growth every quarter going forward, but the electronic-payments trend has it positioned for decades of market-beating growth to come.

More From The Motley Fool

Jason Hall owns shares of Bank of America, Berkshire Hathaway (B shares), Coca-Cola, and Mastercard. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Mastercard. The Motley Fool has a disclosure policy.

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