Nobody’s been shielded from the market’s recent rout, even legendary investor Warren Buffett and his acolytes. Shares of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) are down to the tune of 20% since their late-March peak, more or less mirroring the loss dished out by the Dow Jones Industrial Average during that time. And it certainly feels like things could get worse before they get better.
Before abandoning the market altogether, though, take a breath, take a step back, and take a look at the bigger picture. Will any of the current noise matter five years from now? Probably not. In fact, the recent marketwide sell-off is ultimately a long-term buying opportunity. You can even borrow a few of Berkshire’s ideas, which Buffett and his team haven’t given up on. Here’s a closer look at three of these undeservedly underrated prospects still in his portfolio.
Bank of America
It’s a seemingly scary time to be holding bank stocks. Interest rates are rising ahead of what could become a full-blown recession, potentially crimping the lending industry. A tepid economy also slows down other financial-related businesses like capital markets and wealth management. Bank of America (NYSE: BAC) isn’t immune to this fear, given that shares are now trading more than 30% beneath their February peak, reaching new 52-week lows just this week.
The future, however, may not be nearly as grim as this pullback implies.
Bank of America’s chief financial officer Alastair Borthwick commented at an industry conference Monday that “credit is in great shape,” pointing to the 9% increase in consumer spending over the previous June. While this is certainly a self-serving assessment, he added that credit card balances are currently below their pre-pandemic levels, calling that a “testament to the health of the consumer.”
Also bear in mind that while rising interest rates make borrowing money a less compelling prospect, higher interest rates also improve profit margins on any lending business that banks are still able to generate. The trick is for the Federal Reserve to moderate its planned rate hikes to avoid jolting would-be borrowers out of the market. Borthwick also said at the conference that “across the board right now, we’re seeing reasonably good loan growth” and “we should see high-single-digits growth in loans.”
Perhaps the market is simply overreacting to alarming headlines.
It’s no secret that consumer goods companies are battling inflation right now, and The Coca-Cola Company (NYSE: KO) isn’t escaping that headwind. But the soft-drinks giant may not be as overwhelmed by soaring commodity costs as many of its peers.
The company’s defense against brutal inflation is its business model. Coca-Cola has spent the past several years divesting many of its bottling operations — where most of any commodity expense is incurred — to focus more on licensing. This shift has reduced overall revenue, but because brand licensing and royalties are a very high-margin business, the end result has been improved overall profit. In this vein, last quarter’s 16% year-over-year revenue growth was matched evenly with a 17% increase in operating costs, producing 16% growth in the company’s gross profit. Connect the dots: If inflation is a big problem for this licensing-focused company, it’s not showing up in the numbers.
All that being said, this profitability resilience isn’t quite the core reason Coca-Cola shares are holding up so well against an otherwise bearish backdrop (although it is related). Rather, the reason this stock is still underrated is the dividend that the profit supports. The soft-drinks maker has not only paid a dividend every year for the past 60 years, but has raised its annual dividend payment in every one of those 60. In an inflationary environment that could lead to broad, lingering economic weakness, the combination of reliable income and income growth is a very big deal.
The dividend yield currently stands at 2.9%.
Finally, add General Motors (NYSE: GM) to your list of underrated Buffett stocks to buy right now.
GM shares have been particularly poor performers of late, largely because of their lack of dividend. The carmaker suspended its dividend payments shortly after the COVID-19 pandemic took hold in early 2020, not knowing what the future held at the time. Although there was chatter that the company might announce the resumption of its payouts as part of February’s fourth-quarter earnings report, that didn’t happen. It’s also possible investors feel that General Motors is falling behind in the electric vehicle (EV) market, which is led by Tesla but is also now being addressed in a big way by rival automobile manufacturer Ford Motor. Meanwhile, carmakers are still struggling to get all the microchips needed to make modern vehicles. Whatever the reason(s), GM shares have been cut in half since early this year.
That’s simply too much doubt, though, for a couple of reasons.
First, even with its logistics and competitive challenges, General Motors’ stock is now valued at less than 5 times this year’s projected profit of $7 per share, and at less than 5 times next year’s anticipated earnings of $6.73 per share — an earnings dip that can hardly reflect waning demand.
Second, while the company opted to hold off on paying dividends again in February, the fact that GM’s restoring dividends is being discussed at all suggests it could happen sooner rather than later.
Bonus: While GM is no Tesla and is seemingly falling behind Ford on the EV front, it may be deeper into the market than most investors appreciate. Not only does the company expect to see record sales of its all-electric Chevy Bolt this year, it will also begin deliveries of an all-electric Equinox next year, as well as an all-electric Silverado pickup truck. These battery-powered versions of more mainstream vehicles could ramp up its EV reach in a huge way.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Tesla. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.