Should I follow Warren Buffett and buy these 2 stocks?

Warren Buffett is perhaps the most famous investor of all time. With a net worth over $100bn, Buffett famously invests for the long term. Recently, through his company Berkshire Hathaway, he has added to two current holdings, Ally Financial (NYSE:ALLY) and Activision Blizzard (NASDAQ:ATVI). Should I follow him?

Strong revenue and cash flow

Shares in Ally Financial have slowly declined over the past year and, at the time of writing, they’re trading at $36.91.

There has been heightened interest in the financial services and lending firm recently as Buffett has tripled his original position in the last quarter. So, what does he find so attractive?

A glance at the firm’s earnings per share (EPS) record makes it obvious that it has grown rather rapidly. Between 2018 and 2021, EPS rose from $2.97 to $8.44 per share. By my calculation, this means that the business has a compound annual EPS growth rate of 29.8%. This is something I’m sure Buffett would be pleased with.

Additionally, the company has enjoyed strong upward movement in revenue over the same period, rising from $6.7bn to $8.7bn.

There is the risk, however, that the firm’s mortgage segment is impacted detrimentally by rising interest rates. While it could profit from higher rates, it’s possible that potential customers will be deterred from taking on more expensive debt. 

With operating cash flow of $5.89bn and a cash balance of $3.7bn, though, I think the business could make it through any short-term issues.

Eye-watering earnings growth

Second, Buffett topped up his holding in video games publisher Activision Blizzard. Like Ally Financial, this company exhibits solid EPS growth. Between 2017 and 2021, EPS rose from ¢36 to ¢347. This results in a compound annual EPS growth rate of 57%.

Furthermore, it displays consistent revenue growth over the same period, increasing from $7bn to $8.8bn. It’s worth nothing, however, that this growth is not guaranteed in the future.

The business benefited from the trend of increased gaming during the pandemic. With its flagship Call of Duty and World of Warcraft games, the firm surged to pre-tax profits of $2.6bn and $3.1bn in 2020 and 2021, respectively.

However, revenue for the three months to 30 June fell by 28.4%. There is also the real risk that fewer gamers are able to afford products in the coming months as the cost-of-living crisis bites.

Overall, though, costs for the most recent quarter remained stable and any potential threats appear short-term in nature. 

Warren Buffett’s recent acquisitions definitely give me food for thought. They represent two completely different sectors and may therefore offer some scope for diversity within my portfolio. On top of this, their respective earnings growth is extremely attractive. I’ll therefore add both businesses to my portfolio in the near future.

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