Few investors have run circles around the broader market quite like Warren Buffett, CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). Even though Buffett hasn’t exactly outperformed the broad-based S&P 500 over the past decade, his performance over the past 55 years speaks volumes…
Whereas the S&P 500 has risen by a cool 19,784% since 1965, inclusive of dividends, Berkshire Hathaway’s per-share market value has soared an almost unfathomable 2,744,062%.
Having averaged an annualized gain of 20.3% over the past 55 years, Buffett has earned a ton of respect on Wall Street. This is to say that when the Oracle of Omaha buys or sells something, Wall Street and investors watch with a keen eye.
Berkshire Hathaway has a 46-security portfolio that, as of this past weekend, was worth about $211 billion. Many of these 46 securities are sound businesses that, over the long run, should generate wealth for shareholders.
But among these 46 holdings, three stand out as being particularly attractive investments at the moment, while two of Buffett’s holdings are best avoided in their entirety.
Buy it: U.S. Bancorp
Easily one of the most attractive companies in Buffett’s portfolio, and one he’s been eagerly adding to recently, is U.S. Bancorp (NYSE:USB).
As of this past weekend, U.S. Bancorp was valued at 24% above its book value. For context, it hasn’t ended a year at less than 66% above its book value in over a decade. The reason it commands such a premium relative to other big banks is the fact that it consistently generates the highest return on assets (ROA).
Whereas most big banks were lured into risky derivatives prior to the financial crisis, U.S. Bancorp avoided this temptation. This left it uniquely positioned following the financial fallout to rebound much faster than its peers. When coupled with its efforts to steer consumers toward its digital and mobile apps, as well as control its operating expenses by closing some of its physical branches as consumers migrate to online banking, U.S. Bancorp has been able to maintain its ROA lead over other big banks.
In other words, anytime U.S. Bancorp nears its book value, it becomes an attractive stock to buy.
Buy it: Teva Pharmaceutical Industries
Though it’s not a stock that all investors will have the stomach to own, brand-name and generic-drug developer Teva Pharmaceutical Industries (NYSE:TEVA) has all the makings of an undervalued company that can make investors some serious money.
Teva has been pressured in recent years by legal settlements, a burdensome debt load tied to its Actavis deal, the loss of exclusivity for its top-selling brand-name drug Copaxone, and more recently by its ties to the opioid crisis. Yet the company has made incredible progress since turnaround specialist Kare Schultz took over as CEO in the second half of 2017. Since then, Teva has reduced its annual operating expenses by about $3 billion, all while lowering its net debt by close to $10 billion. Work remains to be done, but Teva is no longer in the financial doghouse it once found itself in.
On a longer-term basis, Teva stands to benefit from an aging global population that’s gaining increased access to prescription medicines, as well as rising brand-name drug costs that’ll only fuel demand for cheaper generics. In other words, Teva’s pricing power should steadily improve over time. That’s great news for a company currently valued at only 4 times next year’s projected earnings.
Buy it: Amazon
You might think e-commerce giant Amazon.com (NASDAQ:AMZN) is pricey at $2,500 a share, but that couldn’t be further from the truth. In reality, Amazon might end the year at a cheaper valuation than at any point over the past decade.
One of my favorite metrics when analyzing the FAANG stocks is operating cash flow. While the price-to-earnings ratio works great for mature businesses, it doesn’t do a very good job of encapsulating value for faster-growing businesses like Amazon that tend to reinvest a significant portion of their cash flow. That’s where operating cash flow comes into play. According to Wall Street, Amazon has consistently been valued at 23 to 37 times its operating cash flow over the past decade. Yet, between 2019 and 2023, Wall Street is looking for Amazon to nearly triple its cash flow, potentially pushing its price-to-operating-cash-flow multiple below 13.
Though Amazon’s roughly 40% e-commerce market share and…
Continue reading at THE MOTLEY FOOL
