It's not easy to beat the market. In 2023, 60% of actively managed, large-cap equity funds underperformed the S&P 500. The last year when a majority of these funds outperformed the market was in 2009.
That's why investors eagerly follow Warren Buffett and pay attention to whatever his holding company Berkshire Hathaway buys. Berkshire Hathaway consistently beats the market, and the way Buffett tells it, it isn't all that hard if you're focused on the right factors.
Berkshire Hathaway owns about 50 stocks at a given time and is diversified across industries and categories. However, it leans toward value stocks and has a high concentration of financial stocks.
American Express and Bank of America are two of Buffett's favorite stocks. However, if you're looking for stocks with serious growth potential, take a look at two of Buffett's newer positions. Ally Financial (ALLY 0.66%) and Nu Holdings (NU 1.58%) are two Buffett stocks that are stirring up excitement on Wall Street and could be excellent picks for an individual portfolio.
1. Ally: Digital and value go hand in hand
Ally was spun off as the financial arm of General Motors in 2009 and only became a public company in 2014. It retains a robust auto lending segment but has become the largest all-digital bank in the U.S. It's been moving up on the list of the largest overall U.S. banks because it has its finger on the pulse of what interests banking consumers today -- and they continue to flock to Ally's business.
The auto lending and personal-banking segments make up a powerful combination of growth drivers for the company. In 2023, Ally had 13.8 million auto loan applications, but rigorous credit evaluation models led it to approve just 30%, a five-year low, while the retail weighted average FICO (Fair Isaac Corporation) score was at a five-year high. It originated $9.6 billion in loans and was the No. 1 prime auto lender.
Personal banking ended the year with more than 3 million accounts, a 13% year-over-year increase, and $154.7 billion in deposits, $2.4 billion more than last year. It has an incredible 97% customer retention rate, which means once it captures customers, it's likely to keep them.
Multiproduct customer count also continues to increase, and Ally is well-positioned to benefit from cross-selling over time.
Because of higher interest rates, the bank ended the year with lower earnings per share and net interest income and margin. But it's capitalizing on its large opportunity and could be a standout stock in the years to come as it offers formidable competition for bigger banks. It also pays a dividend that yields 3.2% at the current price.
2. Nu: Shaking up banking in Latin America
Nu is one of the only true growth stocks in the Berkshire Hathaway portfolio. It's reporting rapidly rising revenue and increasing profitability. In many ways, this Brazil-based digital bank is just getting started.
Revenue increased 57% from a year earlier in the 2023 fourth quarter, and net income grew from $58 million to $360 million. Both have been steadily increasing, with revenue growing at a compound annual growth rate of 82% during the past two years and net income coming in positive for the past six consecutive quarters.
Several factors are working together. Nu is all digital, like Ally. It offers an easy-to-use app with all financial services in one place, and its low fees attract a wide range of customers. Although these features are clearly a draw to the penny-pinching population, Nu has emerged as a popular alternative for Brazil's affluent consumer base.
As customers experience Nu's services, they're signing up for more, leading to profitability at a scale that's a similar growth model to Ally's. Average revenue per active customer (ARPAC) is an important indication of how Nu is using that strategy to its benefit; ARPAC increased from $8.20 to $10.60 in the 2023 fourth quarter.
The second, key part of that strategy is that the bank isn't increasing the cost of serving customers while it generates higher revenue per customer. The cost of serving remained constant at $0.90 in the fourth quarter.
There's a long and open runway ahead for Nu. While it continues to gain millions of customers quarterly, adding 4.8 million in the 2023 fourth quarter, it's far from full penetration in its home market of Brazil and it's just beginning to crack open the markets in Mexico and Colombia.
Nu is a top growth stock. Buffett watchers shouldn't pass it over for the more well-known ones.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions in American Express and Nu. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Fair Isaac, General Motors, and Nu and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
