Many investors follow Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) portfolio of nearly 50 stocks and exchange-traded funds for fresh investment ideas. It's a great starting point because those investments were hand-picked by Warren Buffett, one of the world's most acclaimed investors, and his experienced management team.
That's why it was alarming when Berkshire started selling a lot of stocks -- including half of its stake in Apple and all of its shares of HP and Snowflake -- during the past year. Its cash and equivalents also swelled to a record $277 billion at the end of the second quarter, which suggests Buffett is hoarding some dry powder in anticipation of a stock market slump.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But Berkshire didn't sell any shares of the card processing giant Visa(NYSE: V) during the past year. It also significantly increased its position in the American-Swiss insurance company Chubb Limited(NYSE: CB). Let's see which one of these resilient financial stocks will generate bigger gains during the next 12 months.
Visa faces macro and antitrust challenges
Berkshire started to buy Visa's stock in the third quarter of 2011. It now holds 8.3 million shares of Visa, and that $2.21 billion stake accounts for 0.7% of its entire portfolio.
Visa operates one of the world's largest card payment processing networks, but it doesn't issue any credit or debit cards itself. Instead, it relies on banks and financial institutions to partner with the company to issue co-branded cards. Those partners actually hold all the debt and are responsible for collecting payments.
Visa only makes money by charging merchants swipe fees (usually 1.5% to 3.5%) for each card transaction. It splits those fees with the issuing banks and keeps the rest as revenue. Its rival Mastercard uses the same business model.
Visa's scale, brand recognition, and customer retention make it an evergreen investment. From fiscal 2013 to fiscal 2023 (ended in September), its revenue rose at a compound annual growth rate (CAGR) of 11% as its earnings per share (EPS) grew at a CAGR of 16%. It repurchased more than a fifth of its shares during the past decade.
Yet Visa isn't immune to economic downturns. Inflation throttled consumer spending during the past two years, and a recession could easily curb its growth. It also faces a lot of pressure from antitrust regulators to lower or cap its swipe fees.
Nevertheless, analysts still expect Visa's revenue and earnings to rise 10% and 17%, respectively, in fiscal 2024. Its stock looks reasonably valued at 24 times next year's earnings, but the macro and regulatory issues could hurt its valuations.
Chubb is generating stable growth in a volatile market
Berkshire started to buy shares of Chubb in the third quarter of 2023. It added more shares during the following three quarters, and it currently holds more than 23 million shares. That $7.37 billion stake accounts for 2.4% of its portfolio.
It isn't surprising for Berkshire to invest in one more insurance company. It already owns major insurers like GEICO and Gen Re, and it generated 40% of its operating earnings from its insurance underwriting and investment businesses last year.
Chubb is the world's largest publicly traded provider of property, supplemental health, and casualty insurance. It's based in Switzerland, but it does business in 54 countries and territories while employing about 40,000 people worldwide.
The current version of the company was created in 2016 after ACE Limited acquired the original Chubb Corporation and inherited its brand. From 2016 to 2023, Chubb's revenue grew at a CAGR of 7% as its EPS rose at a CAGR of 14%. Its consolidated net premiums increased by double-digit percentages during the past three years, while its core operating income climbed by the double digits during the past two years. It also repurchased 13% of its shares during the past seven years.
In the first half of 2024, Chubb's consolidated net premiums and core operating income increased 13% and 16%, respectively. That growth was driven by its rising property and casualty (P&C) underwriting, life insurance, and investment income.
Analysts expect Chubb's revenue and adjusted earnings to both grow about 9% for the full year. Those are solid growth rates for a stock that trades at less than 13 times forward earnings, and it faces fewer macro and regulatory headwinds than Visa.
The better buy: Chubb
Visa and Chubb are both reliable long-term investments, but it's easy to see why Berkshire didn't buy more shares of the former and added more shares of the latter. Visa's stock isn't a screaming bargain, and it's more vulnerable to an economic slowdown than Chubb. Chubb's business model is more resistant to economic headwinds, and its stock looks cheaper relative to its growth potential. That's why I believe Chubb has a clear shot at outperforming Visa over the next few quarters.
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Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, HP, Mastercard, Snowflake, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
