3 Top Stock Picks Warren Buffett Would Approve Of

It’s officially an end of an era. Or it will be soon.

Berkshire Hathaway (NYSE:BRK-B) CEO Warren Buffett has announced that he indeed plans on stepping down as the company’s CEO at the end of the year. This move will pave the way for Canada-born Greg Abel to take the reins, and take the company to its next level – at least, that’s what Buffett appears to be banking on. 

Warren Buffett’s incredible career, which spans more than six decades at the helm of Berkshire Hathaway, has produced some eye-popping returns for investors over time. With an average annual return of roughly 20% (compared to a return of around 10% per year for the S&P 500 since Buffett took over as Berkshire’s CEO), this investing conglomerate has compounded at an outstanding rate. Investors who put capital to work in Berkshire at its inception have yielded a return of more than 5,000,000% (that’s right) compared to a return of less than 35,000% percent (still not bad) for the S&P 500 over this time frame.

So, as we usher in a new era moving forward, investors looking to pick stocks like Buffett certainly have their work cut out for them (with Buffett likely to do less of the stock picking moving forward. But given his past criteria and the kinds of stocks/sectors Buffett prefers, here are three stock picks I think Buffett would approve of right now. 

Altria (MO)

Warren Buffett hasn’t been afraid of investing in sectors that other institutional investors have eschewed on social grounds. Altria (NYSE:MO) is one such company that may not necessarily be on the “green lighted” list of stocks some investors can choose from.

But being excluded from such lists means that companies like Altria are likely to trade at a discount to peers in similar sectors. At least on a historical basis, this has been true. 

But given Altria’s incredible operating margin (one of the highest in the consumer staples sector) and its incredible (and growing) cash flow profile the company uses to pay very robust dividends (which also continue to grow over time), there’s a solid argument to be made that Altria is exactly the kind of cash flow-producing dividend-paying stock long-term investors like Warren Buffett would opt for in any market environment.

Given Altria’s resilient cash flows, defensive upside over the long-term and valuation at just 9.5-times earnings (with a 6.9% dividend yield), there’s a lot to like about Altria at current levels. 

Northrop Grumman (NOC) 

Leading defense contractor Northrop Grumman (NYSE:NOC) certainly looks like a stock Warren Buffett would like in this current environment, for a number of reasons. For one, the geopolitical environment continues to devolve into one resembling chaos.  Thus, as a portfolio hedge, and a broader hedge against this macro uncertainty, investing in a company like Northrop Grumman certainly makes sense for those with a truly long-term investing time horizon (and who has proven their ability to be patient over the course of decades better than Mr. Buffett himself). 

Northrop Grumman’s financials certainly pass the Buffett sniff test, with the company bringing in significant revenue and earnings growth. These growth rates have continued to remain in the high single digit range for years, and continue to be boosted by both domestic and international growth in arms purchases.

As the geopolitical backdrop continues to evolve, I’m sure we’ll see these numbers upshift (or maybe downshift) over time. However, I think Northrop Grumman’s mission systems and space systems divisions (small, but meaningful contributors to the company’s overall top and bottom lines) could buoy this stock in any market evnironment. 

Alibaba (BABA)

One stock I’ve long thought could be the next big add to the Berkshire Hathaway portfolio is Alibaba (NYSE:BABA). Shares of the Chinese cloud and e-commerce giant have been on what’s seemed to be a constant decline in recent years, as global investors largely shifted away from China. Much of this has to do with a rather restrictive Chinese government stance on private business, and a tech sector crackdown which shook many investors out of the market.

However, long-term Buffett followers will note that his long-time partner (unfortunately recently deceased) Charlie Munger has been a big bull on China for years. His view on Alibaba and other Chinese tech giants has been expressed through his own personal holdings, and I’ve expected for a long time that Buffett could follow suit in adding some sort of Chinese exposure to his portfolio.

Buffett has yet to do so, betting on a continuation of the American exceptionalism trade that’s worked so well for decades. Maybe that will continue. But under new CEO Greg Abel, the search for value may lead to new markets outside of the U.S., Japan, Canada and a few other places Buffett has previously ventured into.

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