Warren Buffett, the world’s greatest stock picker, is not buying many stocks these days. Buffett has been a net seller of stocks for nine consecutive quarters. Buffett is highly selective about which stocks he buys.
He uses a two-part test to determine if a stock is worth buying. First, he determines if he can estimate the company’s earnings range for five years or more. If he can’t, he moves on to the next stock.
Second, Buffett only buys a stock if it trades at a reasonable price relative to the lower end of his estimated earnings range. If the stock is not reasonably valued, he moves on. This two-step test might seem simple, but it is more difficult to follow than you might think.
Estimating a company’s earnings over five years or more can be challenging. It is also tough in some market environments to find stocks valued attractively enough to pass the Buffett test. Energy Transfer, a leading North American midstream energy company, might pass the Buffett test in 2025.
The company’s pipelines should transport natural gas, natural gas liquids, and crude oil for years to come. Energy Transfer also pays a distribution that yields around 6.5%. The company expects to grow its distribution by 3% to 5% per year.
Buffett’s cautious stock buying approach
Occidental Petroleum is another stock that Buffett views as meeting his test. He has continued to regularly buy shares of the oil and gas producer.
However, Berkshire owns warrants that allow it to buy the stock at a predefined share price, making the stock more attractive to Buffett than to other investors. Despite high market valuations, there is one stock Buffett always considers a buy: shares of his own company, Berkshire Hathaway. Berkshire’s board amended the buyback rules in 2018, allowing for more flexibility.
These revised rules enable buybacks as long as the company maintains at least $30 billion in cash and Buffett deems the shares undervalued. For 24 consecutive quarters since the rule change, Buffett has authorized share repurchases. With a record $325 billion in cash, Berkshire is well-positioned to continue buying back its own stock.
This consistent repurchase strategy rewards shareholders by increasing their ownership stakes proportionally. Wall Street analysts are predicting significant gains in 2025 for many stocks owned by Berkshire Hathaway. Analysts particularly favor Liberty Latin America, predicting the stock will climb nearly 58% in the next 12 months.
Atlanta Braves Holdings is projected to gain 42%. Occidental Petroleum is expected to rise over 20% in the coming year. The oil and gas producer is down 17% from last year, making it a more attractive investment for Buffett.
Analysts also have a positive outlook for Coca-Cola Company, forecasting a 20% upside.
