Warren Buffett has famously said that "our favorite holding period is forever." To be clear, this doesn't necessarily mean that Buffett actually commits to holding any of his stocks forever. Rather, what he's saying is that he loves to invest in companies that have durable competitive advantages and are so well-run that he could conceivably keep them in his portfolio forever.
With that in mind, here are three excellent financial stocks that could become your portfolio's next "forever stocks." I own all three in my own portfolio, and as a matter of fact, so does Warren Buffett.
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This Wall Street leader is adaptable to changing environments
One of my favorite things to look for in a "forever stock" is adaptability, and one financial stock that has proven its ability to adapt to changing environments is Goldman Sachs (NYSE: GS).
For example, in its second-quarter earnings report, Goldman reported a 40% drop in fixed-income, currency, and commodities trading revenue, and the rest of the industry reported similar results. However, thanks to strength across its other business segments, the bank handily beat expectations on both the top and bottom lines.
In addition, Goldman Sachs has been branching out into new areas, such as unsecured personal lending, and the results so far look quite promising. In less than a year of operation, Goldman Sachs' Marcus lending platform had surpassed $1 billion in loans, and could have lots of room to grow. Another example is Goldman's relatively new online savings account, which pays one of the top interest rates in the industry.
Goldman Sachs won't always produce blowout earnings results. In fact, some of the company's quarterly reports have been somewhat disappointing recently. However, the company is excellent at adapting to a variety of economic environments and maintaining its leading positions in areas like M&A and common stock offerings, and there's no reason to believe that this will change anytime soon.
This is not the same bank that existed a decade ago
The financial crisis was so rough on Bank of America (NYSE: BAC) that it remains in the minds of many of the bank's investors. However, this is not the same bank that existed before the crisis hit.
For one thing, Bank of America is very well-capitalized now. The most recent Federal Reserve stress tests found that after being subjected to a hypothetical economic storm, the bank's CET1 capital ratio would fall to 8.9%, nearly double the 4.5% minimum requirement. This means that the bank could make it through another crisis without having to dilute shareholders like it did last time.
Not only is the bank delivering impressive revenue and earnings numbers lately, but it's also close to hitting key profitability benchmarks. The bank's return on equity (ROE) and return on assets (ROA) of 8% and 0.93% aren't quite at the industry benchmarks of 10% and 1%, respectively, but they've improved greatly since the crisis.
Finally, while I don't suggest buying a stock simply because a billionaire is, it's worth noting that Warren Buffett's Berkshire Hathaway recently became the bank's largest shareholder after it exercised warrants to buy 700 million shares. In recent letters to Berkshire shareholders, Buffett has pointed out that the Bank of America investment is "one we value highly."
A rock-solid brand and diverse revenue stream
American Express (NYSE: AXP) is rather different from credit card processors Visa and MasterCard, despite often being mentioned alongside them. Specifically, Visa and MasterCard don't actually issue credit cards, while American Express does. Not only does American Express earn processing fees like Visa and MasterCard do, but the company also gets a nice stream of interest income from its credit card loans.
One of the best reasons to consider American Express as a forever stock is for its numerous competitive advantages. For one, it has one of the most valuable and highly respected brands in the world. It also has the most affluent group of card members among major credit card issuers, which gives it pricing power over rivals when it comes to the fees it charges merchants. The company also offers a broad and innovative assortment of credit card products, with several unique card member benefits, particularly in its higher-end products.
Despite losing its Costco partnership a couple of years ago, American Express is moving forward nicely, showing strong growth recently, such as 11% year-over-year loan growth. Amex Pays a better dividend than its peers, has an excellent buyback program, and trades for a more attractive valuation.
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Matthew Frankel owns shares of American Express, Bank of America, Berkshire Hathaway (B shares), and Goldman Sachs. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Mastercard, and Visa. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.