The three major indexes have rallied since the start of the year, offering us hope that we're moving closer and closer to the next bull market. After all, history shows us bear markets always lead to periods of market expansion. And that could lift shares of companies that are growing -- or set to grow -- at a fast rate.
So, what should we do to prepare? We should invest in some of these quality players that could excel in a bull market, and a great place to look for ideas is in the portfolio of an investing expert. Here, I'm talking about Warren Buffett. The billionaire investor, as chairman, has led Berkshire Hathaway to a compounded annual gain of nearly 20% in 57 years, topping the S&P 500's performance. Let's check out two Buffett favorites to buy now.
1. Apple
Apple (AAPL -0.07%) has steadily increased revenue and net income over the years thanks to its top-seller, the iPhone, and various other products -- from Macs to the Apple Watch. That's helped the share price climb, and the company's market value reach more than $2.7 trillion today.
But Apple's growth story isn't over, and the company may actually get a big boost from its services business. That business -- including iCloud storage, digital content, payment services like Apple Pay and more -- reported record-high revenue in the most recent quarter thanks to one billion paid subscriptions. Services net sales climbed more than 8% to $21.2 billion, even as the difficult economic environment weighed on product sales.
The good news here is Apple generates more of a profit from its services, with a gross margin greater than 70% compared to gross margin of about 35% for products. And this momentum in services isn't likely to stop as Apple continues to boost its offerings, for example launching new content on Apple TV+ and adding financial products for Apple Card holders.
Finally, it's important to take a look at another element Warren Buffett surely likes, and that's Apple's moat, or competitive advantage. In this case, the moat is linked to Apple's brand strength. And this has helped the company grow return on invested capital and free cash flow over the years as well.
AAPL Return on Invested Capital data by YCharts
Meanwhile, Apple shares trade for about 27 times forward earnings estimates. Buffett always likes a bargain, and this looks like one considering Apple's long-term growth, brand strength, and future prospects.
2. Amazon
Amazon (AMZN 1.75%) is a leader in two markets that are growing in the double-digits: e-commerce and cloud computing. Like Apple, the company has increased earnings over the years -- but it stumbled in recent times as inflation weighed on its costs and on its customers' buying power.
But this actually led to something positive. Amazon improved its cost structure, and this move will help it come out ahead over time. The company has cut jobs, improved efficiency, and focused investments on areas with high potential such as technology infrastructure and artificial intelligence.
It even shifted its fulfillment model from a national to a regional one. This means that if you're in Connecticut, for example, your order will ship from nearby rather than from California. This saves Amazon money and makes deliveries faster, scoring a win for the company and for the customer.
Amazon's recent moves have been bearing fruit. In the most recent quarter, operating income more than doubled year over year, and free cash flow improved to an inflow over the trailing 12 months from an outflow a year ago.
The company also saw improvements in trends at Amazon Web Services (AWS), its cloud computing business, as clients started to deploy new projects again. This is key because AWS generally has driven profit at Amazon.
Finally, like Apple, Amazon also has a moat in the form of its vast fulfillment network and brand strength -- many of us often go straight to Amazon if we're looking for something ordinary or something unusual, figuring you can find it all on the e-commerce site.
Today, Amazon shares trade for 60 times forward earnings estimates, which may seem like a lot. But it's actually reasonable considering the company's position in two high-growth markets, its earnings track record, and earnings prospects. Amazon could flourish in the next bull market -- and so could Buffett's investment and your investment in this top stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
