Since becoming CEO of Berkshire Hathaway (BRK.A) (BRK.B) in 1965, Warren Buffett has been head-and-shoulders above his peers. As of the closing bell on Oct. 27, 2023, the Oracle of Omaha, as he’s affably known, has led his company’s Class A shares (BRK.A) to an aggregate return of well over 4,000,000%. Meanwhile, the broad-based S&P 500’s comparable total return, including dividends, is below 30,000%.
Warren Buffett’s long-term success has encouraged professional and everyday investors alike to ride his coattails to sizable gains. Regardless of how well or poorly the stock market is performing, bargains can always be found in Berkshire Hathaway’s investment portfolio.
As we motor toward the end of the year and enter November, three Warren Buffett stocks stand out as screaming buys.
Mastercard
The first Buffett stock that’s nothing short of a phenomenal buy in November is payment processor Mastercard (MA).
Pardon the pun, but Mastercard had its charge higher declined last week after Wall Street perceived the company’s sales-growth forecast for the fourth quarter to be subpar. Michael Miebach, the CEO of Mastercard, cautioned that macroeconomic uncertainty and geopolitical tensions could curb spending globally in the final quarter of 2023.
Although there are a number of telltale warnings that a U.S. recession or economic slowdown may be on the horizon, this is nothing Mastercard and its peers haven’t dealt with before.
The oft-overlooked aspect of recessions is that they’re short-lived. Of the 12 U.S. recessions after World War II, just three have lasted at least 12 months, with none extending past 18 months. Comparatively, most periods of economic expansion have endured multiple years. Cyclical companies like Mastercard benefit from these disproportionately long-winded expansions, which is what makes short-term downturns such an excellent buying opportunity for investors.
To build on this point, Mastercard purely acts as a payment facilitator. While the prospect of lending would add net-interest income and the potential for annual-fee collection, it would also expose the company to credit delinquencies and loan losses during inevitable recessions. Completely avoiding the lending arena means Mastercard doesn’t have to set money aside to cover loan losses. This is a big-time competitive edge that helps it bounce back quickly from economic “hiccups.”
Mastercard has an impressive growth runway as well. Most emerging markets remain underbanked, and the company has a firm hold on the No. 2 spot in U.S. credit card network purchase volume. The U.S. is the world’s top market for consumption. This means Mastercard is bringing in predictable cash flow in the U.S. while enjoying sustained double-digit growth opportunities in emerging markets.
Valued at 25 times forward-year earnings, Mastercard stock is the cheapest it’s been in five years.
Paramount Global
The second Warren Buffett stock that’s an amazing deal hiding in plain sight within Berkshire Hathaway’s portfolio is media stock Paramount Global (PARA).
Paramount is contending with a triple whammy right now. To start with, advertising revenue has weakened, with most businesses fearful of an economic slowdown. Second, interest rates have soared over the past 18 months, which could make future refinancing and deals costlier for media stocks carrying quite a bit of debt, like Paramount. And third, the necessary push to streaming has been costly. Steep operating losses from the company’s streaming services coerced a dividend cut and have weighed on the company’s bottom line.
While these are tangible concerns that shouldn’t be swept under the rug by investors, they’re not strategic game-changers for Paramount Global.
As noted earlier, the U.S. economy spends an extensive amount of time expanding relative to contracting. This means ad spending is going to grow in lockstep with the U.S. economy over the long run. Over time, Paramount’s legacy media division should see a healthy rebound in ad revenue and ad-pricing power.
Paramount Global’s streaming losses aren’t as big of a red flag as they might appear, either. Paramount+ reached approximately 61 million global subscribers in the June-ended quarter, with Pluto TV hitting roughly 80 million monthly active users in the first quarter of 2023. Paramount’s original content and expansive library should allow it to hike its prices for Paramount+ without meaningful subscriber losses. Meanwhile, PlutoTV, the top free, ad-supported streaming platform, puts it in an ideal position to succeed if the U.S. economy were to dip into a recession.
In a thriving U.S. economy, Paramount Global is capable of $2 (or more) in sustained annual earnings per share. Investors can buy shares of the company right now for less than $11, all while netting a nearly 2% yield. That’s a plain-as-day bargain.
Bank of America
A third Warren Buffett stock that’s a screaming buy in November is none other than Bank of America (BAC). BofA, as Bank of America is more commonly known, is the second-largest holding in Berkshire Hathaway’s $326 billion investment portfolio.
Not to sound like a broken record, but the expectation of economic weakness is weighing on bank stocks. Banks are cyclical businesses that usually see loan losses and credit charge-offs increase when economic growth shifts into reverse.
The other concern for BofA is the company’s unrealized losses on held-to-maturity (HTM) securities. Like a number of financial institutions, Bank of America piled into low-yielding Treasury bonds to generate modest interest income. But with bond yields rapidly rising, the price of those bonds has fallen. The end result is $131.6 billion in unrealized losses on its HTM securities. BofA has no intention of selling these securities and recognizing the losses, but it nonetheless has shaken at least some investor interest in the stock.
But BofA has time on its side. Since recessions and periods of economic uncertainty tend to be handily outweighed by economic expansions, it’s able to grow its loan portfolio and generate progressively more in net income over time.
Something else working in Bank of America’s favor is its interest-rate sensitivity. With the Federal Reserve increasing its federal funds rate by 525 basis points since March 2022, no money-center bank has enjoyed a greater lift, in terms of net-interest income, than Bank of America. The central bank appears to be in no hurry to ease rates, either.
Though BofA is often viewed as something of a dinosaur in the banking space, it’s made reasonably good progress with its technology investments. In particular, 74% of its users are banking digitally (online or via mobile app), with a relatively steady uptick in digital loan sales. Digital transactions are considerably cheaper for banks than any form of in-person or phone-based interaction. In short, these digitization initiatives should improve BofA’s operating efficiency.
Lastly, the valuation screams “bargain.” Bank of America shares are trading at a 23% discount to book value (as of Sept. 30) and are below 8 times forward-year earnings. This represents BofA’s lowest price-to-book ratio since 2015 and its cheapest valuation relative to forward earnings in more than a decade.
— Sean Williams
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Source: The Motley Fool