In this article we present the list of 10 Best Value Stocks to Buy According to Warren Buffett.
Warren Buffett, the chairman and CEO of $524 billion holding company Berkshire Hathaway, is a revered investor who has achieved incredible success by sticking to the principles of value investing that he adopted from his teacher and mentor Benjamin Graham.
Our calculations of Buffett’s holdings found that between 1999 and 2017, his stock picks significantly outperformed the S&P 500’s total returns. Their equal weighted average monthly returns came in at 0.97% during that period, crushing the S&P by 0.38 percentage points. Even as value stocks slumped heavily over the last decade, Buffett’s picks continued to outperform the market, topping the S&P by 0.21 percentage points per month on average between 2008 and 2017.
Now just imagine what the Oracle of Omaha could do in a market that actually values value stocks. While that day may not be coming any time soon, we did see the strongest push for value stocks in the last two decades after the first wave of positive coronavirus vaccine news hit in early November.
Warren Buffett of Berkshire Hathaway
At a current P/E of 37.4x, the S&P 500 is more expensive than it’s ever been save for two other points in history: at the height of the tech bubble in the early 2000s, and during the 2009 financial crisis, when it briefly peaked at over 123x. The current figure does need to be given its obvious proper context however, that being that earnings have been heavily, and let’s say unfairly, impacted by the pandemic.
That doesn’t mean there aren’t legitimate warning signs that certain parts of the market have become perilously overvalued, namely growth stocks, whose price-to-sales ratio has now surpassed the levels of their tech bubble peak. Renewables appear to be leading the new bubble, with companies like Plug Power, Inc. (NASDAQ:PLUG), up over 1,000% this year, pricing in several years or even decades worth of growth right now.
Given that backdrop and the unquestionable investing prowess of Buffett during any market conditions, it’s a great time to consider adding some quality value stocks to your portfolio. While there’s no clear definition of what a value stock is, it’s generally regarded as a stock that is trading at a lower multiple than either the market as a whole or its particular industry. We’ll go with the former definition for the purposes of this article.
Only a handful of Buffett’s top stock picks did not qualify as value stocks using that methodology, namely Apple Inc. (NASDAQ:AAPL) and Charter Communications, Inc. (NASDAQ:CHTR). While Apple is generally considered a growth stock anyway, it’s been trading at value stock levels for a long time, including when Buffett first started building a stake in the tech giant back in early 2016. However, Apple’s valuation has now pushed past 40x earnings, eclipsing the S&P’s mark.
The following list of Buffett’s top value stocks is based on Berkshire Hathaway’s latest 13F filing with the SEC for the reporting period of September 30. We pay close attention to Buffett and the hedge fund industry’s top stock picks because our research has uncovered multiple ways to profit from their consensus picks.
Hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Now then, let’s check out the 10 Best Value Stocks to Buy According to Warren Buffett. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10. General Motors Company (NYSE:GM)
Buffett has owned a stake in General Motors Company (NYSE:GM) dating back to early 2012 and has gradually added to the position over the years. He bought another 5.32 million GM shares in Q3, giving Berkshire an even 80 million shares and a 5.5% ownership stake in the automaker.
Buffett praised GM CEO Mary Barra last year for the “sensational” job she has done, which includes successfully modernizing and strengthening its production processes, cutting back on costly overproduction and suboptimal fleet sales to rental companies, and exiting struggling markets. The initiatives have driven GM’s margin expansion higher and lowered the company’s P/E to just over 18x.
9. The Bank of New York Mellon Corporation (NYSE:BK)
BK ranks 9th in our list of the best value stocks to buy. Buffett has been a big fan of banks for decades, and has now owned The Bank of New York Mellon Corporation (NYSE:BK) since 2010. Buffett did trim several of his bank holdings earlier this year, including BK, unloading 10% of his BK shares during Q2 while investing in gold, a signal that the billionaire money manager doesn’t expect a quick economic recovery. Nonetheless, Buffett still owned 72.36 million BK shares, giving him an 8.17% ownership stake in the investment bank, which has a P/E of just under 9x.
8. Verisign, Inc. (NASDAQ:VRSN)
VRSN ranks 8th in our list of the the best value stocks to buy now. Verisign, Inc. (NASDAQ:VRSN) is one Buffett’s lesser-known tech holdings, which he’s owned since late 2012. Other hedge funds are starting to take note of the internet infrastructure and domain name registry company as well, as hedge fund ownership of VRSN has jumped by 84% since the middle of 2018.
Verisign has been highly successful in cutting costs and growing its operating margins in recent years, pushing the latter mark higher by 4.7 percentage points to 65.4% between 2017 and 2019. That has allowed its P/E to hover around 2017 levels of 31x even as the stock has gained 185% since the end of 2016.
7. DaVita Inc (NYSE:DVA)
DVA ranks 7th in our list of the best value stocks to buy now. DaVita Inc (NYSE:DVA) is another longtime holding of Buffett’s, dating back to 2011. He did trim 2 million shares from the position in Q3, leaving Berkshire with a stake of 36.1 million DVA shares and a nearly 30% ownership stake in the healthcare company, which operates about 2,700 dialysis clinics in the U.S.
The company became a target of notable short seller Jim Chanos last year, who characterized its reimbursement model as an insurance scam and at risk of regulatory blowback. The market has thus far disagreed, as DaVita has been one of Buffett’s best performing stocks this year, gaining 54% and currently trades at 18x earnings.
6. U.S. Bancorp (NYSE:USB)
U.S. Bancorp (NYSE:USB) is another one of Buffett’s favorite banks and one of the 10 Best Bank Stocks To Buy Right Now. The billionaire money manager owns nearly 132 million USB shares as of September 30, having trimmed the holding by just 1% this year.
U.S. Bancorp has been hit harder this year than some of Buffett’s other top bank stocks, with shares being down 21%. That’s likely due to its lack of investment banking activities, leaving it with heavier exposure to interest rates and commercial lending. Despite that, USB has actually performed quite well, growing its revenue slightly in Q3 year-over-year and earning $1.40 per share. It trades at about 15x earnings and at a price-to-book of just 1.47x, well below its five-year average of 1.8x.
5. Moody’s Corporation (NYSE:MCO)
Moody’s Corporation (NYSE:MCO) is one of Warren Buffett’s oldest holdings, dating back more than two decades. Buffett’s holding company Berkshire Hathaway owned 24.67 million shares of MCO on September 30, giving it a greater than 13% ownership stake in the company. MCO has also been one of Buffett’s top performing stocks over the last decade, with annualized returns of about 28%.
Buffett has called the credit ratings agency a “fantastic business” in the past, pointing out the powerful, and non-negotiable, position it holds in the market. Buffett loves stocks that have wide moats, and Moody’s has as close to an unassailable moat as you’ll find. It’s also been an earnings machine and continues to grow its operating margins, reaching 47.3% on that score in the third quarter, a 3-percentage point climb year-over-year. MCO shares trade at 29x earnings, nicely below their five-year average of 35x.
4. The Kraft Heinz Company (NASDAQ:KHC)
Hedge funds have soured on The Kraft Heinz Company (NASDAQ:KHC) over the past five years, with about 35% of the stock’s former shareholders having moved on to other investment opportunities. Buffett is not one of them, having held on to every single one of the 325,634,818 KHC shares he acquired in 2015 as part of the private equity-backed mega merger between Kraft and Heinz facilitated by Berkshire and 3G Capital.
That’s not to say Buffett is thrilled with the investment, which would be a tough sell given that KHC shares have cratered by 55% since the merger. He’s admitted that they overpaid for Kraft and also that he would’ve sold some of his shares by this point if his holding had been smaller. Nonetheless, Buffett believes the company is a “great business” and the price looks reasonable at just 0.85x book value.
3. American Express Company (NYSE:AXP)
Buffett and American Express Company (NYSE:AXP) go back a long ways to say the least, all the way to 1964, when Buffett first invested in the credit card and financial services company in the midst of the Salad Oil Scandal (yes, that’s a real thing), a move that perfectly encapsulates Buffett’s motto to be “greedy when others are fearful”.
Berkshire owned over 151 million AXP shares at the end of September, giving it a nearly 19% ownership position in the company. Buffett emphasized the importance of safeguarding the AXP brand during discussions with CEO Stephen Squeri earlier this year in regards to the coronavirus pandemic, which prompted the company to adjust its member rewards and prioritize its customer service. AXP’s earnings have been cut in half this year, nearly doubling its P/E to 28x, but shares still trade at a solid 3.29x sales, only slightly above their five-year average.
2. The Coca-Cola Company (NYSE:KO)
Buffett is not only an ardent investor in The Coca-Cola Company (NYSE:KO), but also a devoted guzzler of its sodas, telling Fortune in 2015 that Cola-Cola accounts for about 25% of his daily caloric intake. Berkshire has owned Coca-Cola shares for over three decades and boasted ownership of an even 400 million of them as of September 30. That number isn’t likely to decline any time soon, as Buffett has been saying for years that he will never sell a single share.
Even as soda sales are generally slipping in developed markets and KO’s revenue slid by over 25% between 2015 and 2018, Coca-Cola has become a more profitable company than ever, with net margins hitting 24% in 2019 and has one of the most valuable brands in the world. Return on equity was just shy of 50% last year and Coke’s 27x P/E is the lowest it’s been in four years.
1. Bank of America Corporation (NYSE:BAC)
Topping the list is another one of Buffett’s favorite bank stocks, Bank of America Corporation (NYSE:BAC), which Berkshire owned 1.01 billion shares of on September 30. And while Buffett has sold off some of his stakes in other banks this year, he added over 85 million BAC shares to Berkshire’s 13F portfolio in Q3.
Buffett, who has been fairly conservative himself this year with his capital allocation, maintaining a large cash position throughout the year, likely appreciates BAC’s own conservatism. The bank is well above its CET1 ratio (a measure of its capital position in relation to the riskiness of its assets), far more so than the other major investment banks. Bank of America shares are quite a bit cheaper than they were last year, trading at just above 1x book value and 2.95x sales, and Buffett got them at an even cheaper rate in Q3, so it’s not surprising to see him pour some of his massive cash pile into further building his stake in BAC, his top value stock pick.
If you’re looking to add some consistent performers to your portfolio that some investors refuse to touch (their loss), don’t miss the Top 10 Sin Stocks to Buy Now.
Suggested Articles:
Disclosure: None. 10 Best Value Stocks to Buy According to Warren Buffett is originally published at Insider Monkey.
