2 Warren Buffett Stocks to Buy Hand Over Fist and 1 To Avoid

The broader stock market may be experiencing turbulence, but Berkshire Hathaway remains a shining beacon of success. Guided by the legendary Warren Buffett, this conglomerate continues to deliver for investors year after year. Over the past 25 years, Berkshire Hathaway has achieved an impressive annualized return of 11.1% -- crushing the S&P 500, which has climbed around 7.2% annually during the same period.

What sets Berkshire Hathaway apart is its wide-ranging business that thrives across economic cycles and market downturns. However, while Buffett boasts an exceptional track record, it's important to remember that, like all investors, he faces both winners and losers.

If you're looking for investment ideas amid the recent market sell-off, here are two quality stocks to consider and one to avoid.

Image source: The Motley Fool.

Buy: Moody's

Warren Buffett is known for his long-term investing approach, and Moody's (NYSE: MCO) is one of Berkshire Hathaway's longest-held stock positions. In 2000, Moody's spun off from Dun & Bradstreet and has been a part of Berkshire's investment portfolio ever since.

What makes Moody's an appealing investment is its robust competitive advantage in the credit ratings industry. Moody's is one of only three key players in credit ratings, which includes S&P Global and Fitch Ratings, and it enjoys a 32% market share.

Moody's plays an important role in the plumbing of financial markets. It provides credit ratings on entities that issue bonds or debt. These ratings influence borrowing costs, but also provide important context to investors about the quality of a company's debt and how likely investors will be repaid on that debt.

The credit rating business is highly regulated, and rating agencies take years to gain investors' trust. As a result, Moody's has an incredible advantage due to the high barriers to entry that come with breaking into the industry.

The ratings business can have ups and debts, depending on the amount of debt issuance in the market. When interest rates decline, lower borrowing costs encourage companies to issue debt. However, issuance activity can be subdued when rates rise and impact Moody's primary business.

To balance this out, the company also provides risk-related data and analytics. This segment of its business offers reliable subscription revenue, which can help smooth out earnings over time.

Over the past two decades, Moody's has delivered investors excellent returns of 13.8% annually. Given its robust economic moat and strong business, Moody's is an excellent stock for long-term investors.

Buy: Capital One Financial

Capital One (NYSE: COF) is one of the largest card issuers in the U.S. I like the company's merger with Discover Financial Services and the possibilities that open up from it. Last year, the two companies agreed to a merger deal valued at $35 billion, making it one of the largest bank mergers ever.

Regulators have scrutinized the deal, voicing concerns about competition and the impact on consumers. Advocacy groups have argued that the merger could reduce competition in the credit card industry, leaving subprime borrowers with fewer choices. Capital One claims that the move helps increase competition against Visa and Mastercard, which dominate the card-issuing industry.

Currently, Capital One issues cards that are primarily processed through Visa and Mastercard's networks. By issuing cards and operating its own payment network, Capital One could collect swipe fees in addition to the interest income it earns now, giving it a similar business model to American Express.

Capital One investors got good news earlier this month when the Justice Department gave the green light to the merger deal and said, as the New York Times reported, "It did not see sufficient competition concerns to block the deal." Next up, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve will review the merger with input from the Justice Department.

Investors should keep in mind that Capital One users tend to have lower FICO scores, so the company could be more vulnerable to an economic downturn that results in reduced consumer spending. For that reason, keep an eye on its credit quality.

That said, I like the company and its long-term opportunity as a combined entity with Discover, and think the recent decline is a good opportunity for investors to build or add to a position in the credit card company.

Avoid: Ally Financial

Ally Financial (NYSE: ALLY) has a good business and has carved out a niche in automotive lending. The bank has recently pared down its activities, selling its credit card portfolio and stopping the origination of mortgages to focus more on what it does well.

However, Ally operates in a cyclical banking industry. Its core business, automotive lending, is also vulnerable to cyclicality, and economic downturns or shifts in consumer sentiment could slow down its lending activity and impact its $145 billion loan and lease portfolio. This could result in more charge-offs for the bank and impact its bottom-line results.

Ally is a leader in online banking, but faces intense competition from fintech competitors who are aggressively chasing deposit growth, such as SoFi Technologies and Robinhood Markets. It also faces competition for automotive lending. Take Upstart Holdings, for example. The artificial intelligence (AI)-powered lender has made progress in personal loans and expanded its automotive lending business in recent years.

Ally Financial faces tough competition and has focused more on automotive lending as it shrinks some other businesses, making it more vulnerable to the cyclical nature of automotive lending and banking. Therefore, I think this is one Warren Buffett stock investors should avoid.

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Discover Financial Services is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Ally is an advertising partner of Motley Fool Money. Courtney Carlsen has positions in Robinhood Markets. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, Moody's, S&P Global, Upstart, and Visa. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.