2 Warren Buffett Stocks to Buy Hand Over Fist in October

Key Points

• American Express is a premium charge card provider with strong pricing power.

• Visa has a high-margin business model that is protected from inflation.

• 10 stocks we like better than American Express ›

Warren Buffett may be retiring from his role as chief executive officer of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) at the end of this year, but it can still pay to follow what the Oracle of Omaha is doing with the conglomerate's stock portfolio.

The legendary investor has a phenomenal track record, and his stock picks are easily replicable in your own portfolio. Moreover, the core of his strategy is fairly simple: Buy stocks and hold them for the long haul.

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Another central premise he follows is to invest in what he understands, and one of his specialties is the financial sector. Here are two Buffett stocks in that industry to buy hand over fist in the month of October.

A card giant with pricing power

The second-largest position in the Berkshire Hathaway stock portfolio is American Express (NYSE: AXP). The conglomerate owns more than 20% of this dominant player in the premium credit card sector. For decades, American Express has catered to wealthier clients with a variety of credit and charge cards for consumers and businesses. It focuses on providing value for travel, entertainment, and restaurant spending across the U.S., and has a presence in a few other wealthy countries as well.

Last quarter, American Express added 3.1 million new cards. About half went to consumers in the U.S., while the rest were for international and business cards. The company has close to 150 million total cards in circulation. Even though American Express cards have some of the highest fees in the industry, the company has been able to achieve consistent pricing power because of the large array of benefits it has built for its members, such as access to airport lounges.

Last year, it increased the fee for its Gold card from $250 a year to $325. And in September, it bumped the Platinum card's annual fee from $695 to $895, which will help the company keep increasing its fee revenue.

Given the new members joining American Express every quarter and the pricing power flexed by the company, it is no surprise that American Express's earnings per share (EPS) has grown by roughly 158% during the past 10 years. During the next 10 years, I expect similar levels of earnings growth.

Image source: Getty Images.

Durable growth in digital payments

Another payments provider in the Berkshire Hathaway portfolio is Visa (NYSE: V). Visa operates the largest credit card network in the world. Unlike American Express, it does not issue cards, charge annual fees, or manage customer credit risk. Instead, Visa simply processes the payments when someone uses a card connected to its network, in exchange for a small transaction fee. Partner institutions such as Bank of America or JPMorgan Chase do all the account management.

What this means is that Visa only keeps a small portion of the credit card swipe fees, but offloads all the costs and lending risks to third parties. The result is that it operates with an incredible EBIT (earnings before interest and taxes) margin of 67%. Revenue will keep growing in tandem with payment volume, which is protected from inflation because the fees it charges are calculated as a percentage of the transaction size.

During the past 10 years, Visa's revenue has grown by 180%, an impressive feat for a company that is already one of the world's largest by market capitalization. Thanks to operating leverage and share repurchases, its EPS grew by an even more impressive 298%.

Visa and American Express have been mainstays in payments for decades. They should remain so for decades to come. This durability has given Buffett the confidence to buy both stocks for Berkshire Hathaway, a company that retail investors can easily take their cues from, as long as they're willing to implement a buy-and-hold strategy with a time horizon measured in decades, not years.

Should you invest $1,000 in American Express right now?

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American Express is an advertising partner of Motley Fool Money. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Visa. The Motley Fool has a disclosure policy.