Warren Buffett stock picks continue to include a secret stock. Speculation was high that Buffett’s mystery holding would be revealed when his company, Berkshire Hathaway’s (NYSE:BRK.A/NYSE:BRK.B) latest 13F regulatory filing was made public. But no such luck. The Oracle of Omaha, as Buffett is known, has continued to ask the U.S. Securities and Exchange Commission (SEC) for confidential treatment of one of his stocks. Buffett has done this before. In late 2020, he kept secret the positions he was building in oil giant Chevron (NYSE:CVX) and telecommunications firm Verizon (NYSE:VZ). So, what is the latest mystery stock?
While the internet is awash with guesses, Barron’s notes that the new stock is likely a financial company. Berkshire Hathaway disclosed in its recent filings that its cost basis in financials had gone up by $1.2 billion, while its cost basis in other groups of stocks declined. Also, Berkshire hasn’t added to its existing holdings of financial stocks in recent quarters, meaning that it invested in an entirely new company. Eventually, Warren Buffett’s secret stock pick will be revealed. In the meantime, here are our top three guesses.
Morgan Stanley (MS)
Three things might make Morgan Stanley (NYSE:MS) attractive to Buffett right now. First, the investment bank’s main business is wealth management, making it less susceptible to economic cycles and deal-making than most other Wall Street firms. Second, Morgan Stanley is under new management with a new CEO at the start of this year, Ted Pick, a longtime insider at the bank. Pick succeeded former longtime CEO James Gorman, who retired on Jan. 1.
Lastly, MS stock looks undervalued, and Buffett remains, at heart, a value investor. Year-to-date, Morgan Stanley’s stock has declined 8%, bringing its 12-month decline to 11%. Currently, the stock is trading at the same level it was three years ago and is going for 16 times future earnings estimates, which is below the average among stocks listed in the S&P 500 index. Plus, Morgan Stanley pays a hefty dividend of $0.85 a share per quarter, giving it a yield of 3.93%. And Buffett continues to prize dividends.
It might be that Buffett is buying MS stock in hopes that it will rebound once interest rates move lower, as is widely expected later this year.
Federal Agricultural Mortgage (AGM)
Federal Agricultural Mortgage (NYSE:AGM), also known as Farmer Mac, checks many boxes for Warren Buffett. Essentially, the company is a bank for farmers and rural communities across America that has the backing of the federal government. The president appoints five of the 15 board members at Farmer Mac. Buffett would, no doubt, like that Farmer Mac has the backing and oversight of the government at the highest levels.
At the same time, the federal and state governments protect much of the farm sector. Owing to its close government relationships, Farmer Mac has lower interest-rate risk than most commercial and investment banks. And, manyanalysts say we’re now entering a commodities super cycle, with agriculture prices set to rise. AGM stock also looks comparatively cheap right now, trading at 11 times 2024 earnings estimates. Buffett tends to buy stocks for 15 times earnings or less.
Farmer Mac also pays a decent dividend of $1.10 per share each quarter for a yield of 2.38%. This year, AGM stock is down 1%. But it has gained 35% in the last 12 months and is up nearly 130% over five years.
Aflac (AFL)
Buffett is a big fan of insurance companies. Berkshire Hathaway already owns several insurers, including GEICO and General Re. Barron’s suggests that Buffett might be targeting another insurance company in Chubb (NYSE:CB). While that’s a good guess, so is Aflac (NYSE:AFL). Buffett is well-known for liking the premiums insurers collect that can be re-invested, known as “the float.” Aflac would be a nice complement to Berkshire’s other insurance holdings because it provides supplemental insurance coverage.
Additionally, Aflac is trading at a comparatively cheap valuation at just 10 times future earnings estimates. AFL stock pays a healthy dividend of $0.50 a share per quarter for a yield of 2.52%. Aflac’s valuation is lower and its dividend is higher than Chubb’s. Plus, the company generates about 70% of its income in Japan, where work and government insurance coverages are less generous. Buffett is keen on Japan right now, having placed big bets in recent years on the country’s trading houses.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
