Warren Buffett has famously advised to be fearful when others are greedy and greedy when others are fearful, and he has put his money where his mouth is as the market plunged this year. He bought 16 stocks in 2022’s first quarter as other investors were fleeing for the hills.
About half of the stocks he purchased through his holding company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), were additions to positions already owned, and the other half were new positions. Some were already disclosed, and others were surprises. Some of the more unexpected picks were Activision Blizzard (NASDAQ: ATVI), Paramount Global (NASDAQ: PARA), and Ally Financial (NYSE: ALLY). Should you consider them for your portfolio? Let’s take a look.
An easy merger arbitrage deal
Buffett already had a small stake in video game maker Activision Blizzard prior to 2022, so he obviously sees it as a worthwhile stock to own. However, his new interest in the company is in preparation for the company’s acquisition by tech titan Microsoft. The acquisition is set to go through in mid-2023, with Microsoft paying $95 per share, or about a 26% premium to the current price. This could be a risky strategy, since many things can happen between now and then. But the price is highly unlikely to go above $95, and it’s a simple way to see quick gains.
So why isn’t everyone doing this? First of all, although the merger was approved by both parties, there’s still a chance it won’t go through. It’s a riskier play for parties that aren’t backed by Buffett’s billions. The business itself is having a rough time, so individual investors shouldn’t count on a surprise beat to raise the price. In the first quarter, revenue and earnings per share (EPS) both declined. As we get closer to the acquisition date and it seems it will really happen, the price is likely to increase.
What’s in it for Microsoft, or investors who are sticking around right now? It’s an easy way for Microsoft to enter the gaming space, for one thing. More than that, the company is still developing new games to launch. Gaming companies go through phases as they launch new products and see how well they do. For example, Activision has several launches in the second quarter that it expects to do well. In a positive sign, monthly active users (MAU) increased slightly from the 2021 fourth quarter to the 2022 first quarter.
Activision Blizzard stock has been a market beater, but for now, investors might not want to follow Buffett.
A new name in streaming
Paramount Global is the new name for what was formerly ViacomCBS. The company has jumped on the bandwagon and is investing in its streaming service, Paramount+, but it operates a number of media networks including traditional television (CBS) and cable channels such as Showtime and MTV. It’s not as big as competitors such as Disney and Netflix, but what it does have in its favor is a Buffett favorite — it looks undervalued.
Revenue decreased 1% from 2021 in the first quarter as customers continued to cord-cut, but streaming, or the direct-to-consumer division, increased 82%. That included a 95% increase in subscription revenue as well as a 59% increase in ad revenue for its ad-supported platform, PlutoTV. Pluto also added 6.3 million new members for a total of more than 67 million MAUs.
Paramount+ added 6.8 million subscribers for a total of close to 40 million. Many of those are crossovers who view content on both platforms. The media company owns such franchises as Star Trek and Sonic the Hedgehog and has new content coming out in both of those series as well as much more. There are many growth levers here.
However, it’s competing with bigger guns, and as the field gets more crowded, Paramount Global may not have what it takes to keep adding viewers and subscribers. That’s the big question mark.
Meanwhile, the shares are down almost 20% this year despite Buffett’s big bet, and at this price they’re trading at only four times trailing 12-month earnings. That’s pitifully low for a company that grew revenue 13% year over year in 2021 and increased EPS (from continuing operations) by 79%.
More bank stocks to love
Bank stocks make a strong showing in Berkshire Hathaway’s portfolio, and Buffett added a new one, Ally Financial, to the group last quarter. Ally fits right in with Buffett’s model, with cheap shares and a strong culture of giving back to shareholders.
Ally has a large auto-lending unit, which has been its core product for decades. But it also operates a consumer bank, which has been demonstrating sequential growth. It increased to 2.5 million retail banking customers in the first quarter, with $136 billion in deposits, a 6% increase year over year. One of its newer bank ventures, the Ally credit card, had 844,000 active users, up 73% year over year. Net income slightly decreased over last year as it moved money into provisions for credit losses, but revenue increased 10%. Return on common equity was a high 18%.
The company said it would issue $2 billion in share buybacks in 2022, which is a fifth of its entire market cap. It also pays a growing dividend that yields a high 3.7%. That’s partially because the share price has declined more than 30% so far this year. At the current price, the shares also trade at the dirt-cheap multiple of four times trailing 12-month earnings, and less than one times tangible book value, which means they’re trading for less than the value of its assets.
Out of these stocks, Ally looks the most like a no-brainer that individual investors should consider.
Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions in Walt Disney. The Motley Fool has positions in and recommends Activision Blizzard, Berkshire Hathaway (B shares), Microsoft, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $145 calls on Walt Disney, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.