Warren Buffett owns some great stocks. Apple, Coca-Cola, Amazon, and Johnson & Johnson are just some of the names in his portfolio.
But there are two in Buffett’s portfolio, in particular, that strike me as ‘no-brainers’. I’m talking about payments companies Mastercard and Visa. Here’s why I’d follow Buffett into these stocks today.
Mastercard and Visa are both global electronic payment-processing companies that help consumers, merchants, financial institutions, and government entities move money safely and efficiently. You can think of them as the ‘plumbing’ of the world’s financial system. These companies don’t issue credit or debit cards directly. Instead, they provide networks that allow consumers and businesses to make transactions, and process all the transactions.
Huge growth potential
With the world moving away from cash and shifting to electronic payments, both Mastercard and Visa appear to have a huge amount of potential.
Both companies have registered strong revenue growth over the last decade as more payments have been made by card. However, the growth story here appears to have plenty of room to run. According to Allied Markets Research, the global credit card payments market is set to grow by 9% per year between 2021 and 2028. This means that trillions of transactions are set to shift from cash to card in the years ahead.
The ease and convenience of paying for goods and services electronically is expected to be one key growth driver. Adoption in the emerging markets, and the growth of the online shopping industry are also expected to drive growth.
Why I’d buy now
With so much long-term growth potential, one would expect these Buffett stocks to be popular. However, this isn’t the case. Recently, both stocks have been a little out of favour due to the fact that travel spending has been lower during the pandemic.
So, I think now is a great time for me to be buying because both stocks have reasonable valuations, in my view. At present, Mastercard trades at 38 times this year’s earnings while Visa trades at 33 times.
I don’t expect these stocks to trade at these levels for long. That’s because both companies are starting to see a rebound in travel spending. And this is boosting revenues significantly. Last week, for example, Mastercard posted quarterly revenue growth of 27% while Visa posted top-line growth of 24%.
Attractive risk/reward profiles
Of course, there are risks to consider here. One is further Covid-19 variants. If new variants emerge and the travel industry is hit again, these two companies will see their revenues dip.
Another is new payments technologies such as blockchain and crypto. In theory, crypto could make Mastercard and Visa obsolete.
Overall, however, I think these two Buffett stocks offer very attractive risk/reward propositions right now. In the near term, they look set to benefit from the return of travel. Meanwhile, in the long run, they look set to benefit from the shift to electronic payments.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Amazon, Apple, Mastercard, and Visa. The Motley Fool UK has recommended Amazon, Apple, and Mastercard. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
