Three Buffett Stocks to Buy and One to Avoid: A Value Investor's Assessment

The core of value investing is a simple, enduring principle: buy a business at a price that offers a sufficient margin of safety relative to its intrinsic value. This isn't about chasing quarterly earnings beats or speculative growth. It's about identifying durable competitive advantages, or "moats," and pairing them with capable management, all at a price that leaves room for error. The legendary Warren Buffett, whose investment philosophy is the gold standard, built a portfolio of such businesses. His approach, as reflected in Berkshire Hathaway's holdings, is one of patience and conviction-holding for years, even decades, to allow compounding to work its magic.

This assessment will apply that same framework to three stocks currently viewed as compelling buys and one that presents a more challenging case. The focus will be squarely on the durability of each company's economic moat, the quality of its management, and the critical question of whether the current market price offers a margin of safety. We will look past near-term volatility and short-term noise to evaluate the long-term compounding trajectory of each business.

The three stocks under review for purchase are Alphabet, Amazon, and Moody's. Each represents a classic Buffett-style investment thesis in different forms. Alphabet, with its near-total dominance in internet search and a powerful cloud division, possesses a moat that is exceptionally wide. Amazon, despite a tough year and thin margins, is a behemoth in e-commerce and cloud computing, investing heavily to maintain its lead. Moody's, a long-held Berkshire favorite, is a provider of an indispensable, network-driven service in credit ratings. On the other side of the ledger is Aon, a company that, while perhaps fitting the "Buffett stock" label in name, faces a different reality today.

The analysis will proceed by examining the strength of each company's moat, the quality of its management, and the valuation relative to its long-term cash-generating potential. The goal is not to predict tomorrow's stock price, but to assess whether each business is a worthy custodian of capital for the next decade.

Evaluating the Buys: Moats, Management, and Margin of Safety

The three stocks recommended for purchase each possess the wide economic moats that define a classic Buffett holding. The critical question for a value investor is whether their current valuations offer a sufficient margin of safety to justify a long-term commitment. Let's examine each through that lens.

Alphabet presents a fortress moat, built on near-total dominance in internet search and a powerful, expanding cloud division. Its global search share exceeds 90%, a position that is exceptionally difficult to breach. This foundation fuels its advertising engine, which generated $74.18 billion in revenue in the third quarter. More importantly, Alphabet is aggressively leveraging this scale into artificial intelligence. Its integration of AI Overviews and AI Mode is driving query volume, while its custom tensor processing units and infrastructure advantage position it to compete on price and performance in the cloud. The stock's 65% gain in 2025 reflects this momentum, but the valuation has stretched. Analysts see a premium, with shares trading at 25 times estimated 2027 earnings. The margin of safety here hinges on the company's ability to monetize AI at a higher rate than traditional search and to capture significant market share in cloud, where it is projected to reach 60% of Amazon's revenue by 2027. For a patient investor, the moat is wide enough to absorb the current premium, but the price paid is not cheap.

Amazon's moat is built on two pillars: unmatched e-commerce scale and a leading cloud infrastructure business. The company's 29% global cloud market share is a critical asset, and its massive $125 billion in capital expenditures in 2025 is a direct investment in maintaining that lead. This spending funds data centers and AI chips, essential for Amazon Web Services to compete. Yet, the financial health shows pressure. Despite generating over $147 billion in North America and international sales last quarter, Amazon's profit margins were thin, at 4.5% and 2.9% respectively. This reflects the intense competition and high costs of scaling. The margin of safety for Amazon is not in its current profitability, but in its ability to compound over the long term. Its moat is deep, but the path to higher margins is through continued, expensive investment. The stock's modest 5% annual gain in 2025 suggests the market is pricing in this grind. A value investor would need conviction that Amazon's scale will eventually translate into superior returns on that massive capital base.

Moody's represents a different kind of moat-a near-monopoly in credit ratings, a service where network effects and regulatory recognition create formidable barriers to entry. This is a classic Buffett favorite, and its financials reflect the power of that position. The company boasts an astonishing 67.43% gross margin, a testament to the high profitability of its core business. This exceptional margin of safety is built on pricing power and low incremental costs. The business is a cash-generating machine, and its stability is a key reason it has been a long-held Berkshire holding. The valuation, while not as speculative as Alphabet's, is supported by this durable, high-margin franchise. For a value investor, Moody's offers a compelling combination of a wide, defensive moat and a financial profile that rewards patient capital.

The bottom line is that all three companies have strong moats, but the margin of safety varies. Alphabet's is priced for continued AI dominance. Amazon's is priced for a successful, costly expansion. Moody's offers a margin of safety rooted in its exceptionally high profitability and entrenched position. The choice depends on which long-term compounding story an investor finds most compelling and reasonably priced.

The Case for Avoidance: Aon's Valuation and Competitive Position

The final stock in this assessment, Aon, presents a classic value investor's dilemma. On one hand, its long-term performance is impressive, with shares up 75.4% over five years. On the other, its recent trajectory offers little to cheer about, and its valuation suggests the market is pricing in a future that may not materialize. For a patient capital allocator, the high price paid for a business with a potentially narrowing moat may not offer a sufficient margin of safety.

The stock's recent flat performance is telling. Despite the multi-year gain, shares have seen no meaningful move over the last 12 months, with a mere 0.4% decline year-to-date. This stagnation, even after a strong run, hints at a market that has already digested the good news and is now weighing risks. The valuation score confirms these concerns. Aon currently has a valuation score of 2 out of 6, a clear red flag. More specifically, its P/E ratio of 27.72x sits well above the Fair Ratio of 15.98x estimated by Simply Wall St. This premium is not a simple peer comparison; it's a judgment that the market is paying a rich multiple for Aon's earnings, far exceeding what a tailored analysis of its specific profile would support.

The sustainability of Aon's competitive position is the core question. As a global insurance broker and risk advisor, it operates in a cyclical industry where demand for its services ebbs and flows with economic conditions. The company's moat, while wide, is not immune to pressures from consolidation, shifting client needs, and the commoditization of certain advisory functions. The recent flat performance suggests the market is skeptical about near-term growth or margin expansion, viewing the business as trading at a premium without a clear catalyst to justify it.

The bottom line is that Aon's valuation does not leave room for error. For a value investor, the margin of safety is the buffer between price and intrinsic value. When a stock trades at nearly double its estimated fair P/E ratio, that buffer is thin. The long-term gain is a reminder of what the business can do, but the recent stagnation and rich multiple point to a current price that demands near-perfect execution and growth to be justified. In a world of uncertainty, that is a high hurdle.

Catalysts, Risks, and What to Watch

For the patient capital allocator, the investment thesis for each stock hinges on a few key forward-looking factors. The goal is to identify the catalysts that could confirm the long-term compounding story and the risks that could challenge it. Monitoring these will help determine if the margin of safety is widening or narrowing.

For Alphabet, the primary catalyst is the successful monetization of its AI advantage. The stock's 65% gain in 2025 was fueled by Wall Street's belief that Alphabet is the "king of all AI trades." The key is whether AI Overviews and AI Mode can drive query volume to a level where they monetize at a higher rate than traditional search, as analyst Deepak Mathivanan expects. A future price correction that brings the valuation back toward a more reasonable multiple-say, from its current 25x estimated 2027 earnings-would dramatically improve the margin of safety. The risk is that AI competition, particularly from OpenAI, intensifies and slows monetization, or that the current premium reflects a peak in sentiment rather than a sustainable earnings acceleration.

Amazon's catalyst is the long-term payoff from its massive capital investment. The company's $125 billion in capital expenditures in 2025 is a direct bet on maintaining its cloud and e-commerce moats. The watchpoint is whether this spending eventually translates into higher returns on capital and improved profit margins, moving beyond the thin 4.5% North America margin seen last quarter. A future price decline, perhaps driven by cyclical pressures or execution concerns, could offer a better entry point. The primary risk is that the intense competition and high costs of scaling continue to pressure margins, making it difficult to justify the current valuation with the promised future returns.

Moody's presents a more straightforward setup. Its catalyst is the continued compounding of its high-margin, network-driven business. With a gross margin near 67%, the company's earnings power is exceptionally durable. The key is monitoring management's capital allocation-whether it continues to return cash to shareholders via dividends and buybacks, as a disciplined value investor would expect. A future price decline would be a welcome event, offering a margin of safety on a business with a near-monopoly in credit ratings. The risk here is more structural: a major economic downturn that reduces demand for credit ratings, or regulatory changes that erode its entrenched position.

For Aon, the primary risk is that its high valuation is not justified by the sustainability of its earnings power. The stock's flat performance over the last year, despite a 75% five-year gain, suggests the market is pricing in a future of stagnation. The watchpoint is whether earnings growth can accelerate to support a P/E ratio nearly double its estimated fair value. If the business continues to trade at a premium without a clear catalyst, the margin of safety remains thin. The risk is that the market's patience runs out, leading to a re-rating that could pressure the stock significantly.

The bottom line for all investors is to look past the noise and focus on the long-term compounding trajectory. For the buys, watch for execution that validates the moat and management's capital allocation. For the avoid, the high price itself is the biggest risk. In the end, the value investor's job is to ensure the price paid leaves room for the business to grow and for the inevitable uncertainties of the future.