Stock valuations remain elevated, and one of Warren Buffett’s favorite market gauges is flashing a warning sign.
The so-called Buffett Indicator, which compares the total value of the stock market with U.S. GDP, recently reached an all-time high of 237%. Buffett has previously warned that investors are “playing with fire” when this ratio approaches 200%.
That doesn’t mean a market crash is around the corner. Buffett himself has repeatedly said he doesn’t try to predict short-term market moves.
But periods of high valuations are a good time to think about which companies have the durability to hold up when conditions become more difficult. Berkshire Hathaway’s portfolio offers several good places to start.
Here are three Buffett stocks we believe deserve a spot on the watchlist.
Coca-Cola (KO): A Defensive Dividend Stock Built to Last
Coca-Cola (KO) has been part of Berkshire Hathaway’s portfolio for 38 years, making it Buffett’s longest-held stock. It’s also Berkshire’s third-largest equity holding.
There’s a simple reason the company has remained in the portfolio for so long: Coca-Cola sells products people continue buying regardless of what’s happening with the economy.
That business has already been tested through the dot-com crash, the 2008 financial crisis and the COVID-19 pandemic. Coca-Cola wasn’t immune to those downturns, but demand for its beverages proved remarkably resilient.
The stock’s five-year beta of just 0.34 reinforces that defensive profile. A beta below 1 generally indicates lower volatility than the broader market, and Coca-Cola’s is particularly low compared with the S&P 500.
Then there’s the dividend.
Coca-Cola has increased its dividend for 64 consecutive years, earning it a place among the Dividend Kings. The stock currently yields approximately 2.3%.
Coca-Cola trades around $90 per share.
We don’t expect Coca-Cola to be the fastest-growing stock on this list. That’s not why we’re watching it. Its combination of a resilient consumer business, relatively low share-price volatility and more than six decades of consecutive dividend increases makes it the type of company that could become particularly valuable when investors start prioritizing stability.
American Express (AXP): A Buffett Favorite With a High-Quality Customer Base
American Express (AXP) is another company Buffett has been willing to hold through multiple economic cycles.
Berkshire first invested in American Express in 1991. Today, it’s Berkshire’s second-largest equity holding, behind only Apple.
One of the qualities we like most about American Express is its customer base. The company primarily targets relatively affluent cardholders, who historically have continued spending at higher levels during recessions. That can give American Express an important advantage when consumer finances come under pressure.
Unlike Coca-Cola, American Express hasn’t necessarily been a low-volatility stock. Its five-year beta is 1.05, putting its volatility slightly above the S&P 500.
But investors have been compensated for that volatility. American Express shares have nearly doubled over the past five years and handily outperformed the broader market.
Buffett made his long-term view particularly clear in Berkshire’s 2023 shareholder letter, writing, “When you find a truly wonderful business, stick with it.” He identified American Express as one of the select Berkshire holdings he expected the company to maintain indefinitely.
American Express trades around $333 per share and currently yields approximately 1.1%.
We believe the combination of a valuable payments franchise, an affluent customer base and decades of staying power makes American Express worth keeping on the watchlist, particularly if broader market weakness creates a more attractive entry point.
Chevron (CVX): A Dividend Stock That Could Benefit From Higher Oil Prices
Chevron (CVX) gives investors a very different type of defensive exposure.
Berkshire began buying Chevron in late 2020, when energy stocks were still recovering from the pandemic-driven collapse in oil prices. The timing proved excellent. Chevron shares have gained almost 140% since the end of 2020.
More recently, higher oil prices have helped Chevron outperform the broader market.
That could make the company particularly interesting if inflation and elevated energy prices become a source of additional pressure on stocks. Higher oil prices can create problems for consumers and many businesses, but they can provide a powerful earnings tailwind for an integrated energy producer like Chevron.
The company also appears prepared for much weaker energy prices.
Chevron believes it can fully fund both its dividend and planned capital projects with Brent crude below $50 per barrel. Brent was around $88 per barrel in the source, providing a substantial cushion between current prices and the level Chevron says it needs to fund those priorities.
The stock trades around $202 per share and currently yields approximately 3.5%, the highest dividend yield of the three companies on this watchlist.
We like Chevron’s ability to potentially benefit from elevated oil prices while continuing to support its dividend and capital program at substantially lower crude prices. That flexibility makes it a stock worth watching whether energy prices remain high or eventually retreat.
