In a market full of crazy swings, Warren Buffett’s ‘boring bargains’ might have the best upside
The stock market continues to bump up against all-time highs — and that’s making several Wall Street strategists nervous.
The S&P 500 has a historical price-to-earnings (P/E) ratio in the mid-teens. Today, it sits at just below 30.
In the hottest sectors, it’s not unusual to find P/E ratios in the triple-digits.
Growth investing has worked out well for investors — especially during the market frenzy over the past year. But the power of value investing shouldn’t be ignored.
After all, Berkshire Hathaway Chairman and CEO Warren Buffett has largely relied on bargain hunting to grow his net worth to $105 billion.
Here’s a look at three value-type opportunities in Berkshire’s portfolio. One (or all) of them might be worth following with some of your spare change.
Kraft Heinz (KHC)
Kraft Heinz is a household name. The current company was formed by the merger of Kraft Foods and Heinz in 2015.
Today, it’s one of the largest packaged foods companies in the world with annual sales of roughly $26 billion.
As of June 30, Buffett’s company owned over 325 million shares of Kraft, worth about $11.7 billion at the current share price. That makes Kraft the fifth largest public holding at Berkshire.
Business got a solid boost last year as people stocked up their pantries amid pandemic. And things have only continued to improve.
In Q3, organic sales climbed 1.3% year over year and were 7.6% above the comparable pre-pandemic period in 2019.
Shares are up 6% year to date but are down more than 50% over the past five years.
Bank of America (BAC)
Bank of America is Berkshire’s second largest holding — only tech giant Apple occupies more space in the portfolio.
At the end of June, Berkshire owned more than one billion shares of the banking gorilla, a stake now worth around $49 billion.
In its most recent quarter, Bank of America’s revenue grew 12% year over year to $22.9 billion. Profit climbed an even more impressive 58% to $7.7 billion.
The company saw strong credit quality as net charge-offs fell to 20 basis points of average loans, its lowest loss rate in 50 years.
Bank stocks have performed well as a group this year. In fact, Bank of America, Goldman Sachs, Wells Fargo, and Morgan Stanley have all more than doubled over the past 12 months.
But because earnings have also improved substantially, bank valuations are in line with the sector’s five-year average.
Bank of America has a P/E ratio of about 14.
If you’re on the fence about jumping in at the current level, some apps might give you a free share of Bank of America or Wells Fargo just for signing up.
Verizon Communications (VZ)
Verizon is one of the rare large-cap stocks that hasn’t soared over the past couple of years. And as a value investor, Buffett is pouncing on the opportunity.
Berkshire loaded up on 146.7 million shares of Verizon in Q4 2020. And by Q2 2021, the position had grown to 158.8 million shares with a market value estimated at $8.4 billion.
The telecom giant fits nicely in Berkshire’s portfolio: It runs a recurring business, gushes free cash flow, and pays generous dividends.
In Q3, Verizon added 429,000 postpaid phone customers. Meanwhile, operating revenue rose 4.3% to $32.9 billion.
The sector hasn’t been an investor favorite this year. Verizon — along with rivals AT&T and T-Mobile US — are all down more than 10% year to date.
As it stands, Verizon has a P/E ratio of 10.
Socks or stocks?
Even if you don’t agree with Buffett on these specific stocks, you should still implement his time-tested strategy of buying high-quality assets at discounted prices.
Of course, you can apply this value-oriented approach in everything you do — not just investing.
For example, a free browser application allows you to automatically hunt for lower prices and coupons when shopping online.
Because let’s face it: Amazon doesn’t always have the best prices.
It’s free to use and takes seconds to set up.
As Buffett once said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
