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In this piece, we will take a look at the ten Warren Buffett stocks that are too cheap to ignore. If you want to skip our introduction to the investment guru, and want to take a look at the top five stocks in this list, then head on over to 5 Warren Buffett Stocks That Are Too Cheap To Ignore.
The bloodbath in the stock market this year that has shocked investors and rattled retail investors has seen major stock market indexes once again bleed big chunks of their value just as they had started to recover from the coronavirus pandemic. The NASDAQ Composite index is down a painful 35% year to date, the New York Stock Exchange has lost an equally painful 21% and the Dow Jones Index is now down 19%.
During these times, it's hard to fathom putting more money in the market as the soaring U.S. dollar itself becomes a safe haven and cash funds become 'king.' However, for the astute investor, there might be opportunities to sift out which companies saw their fortunes turn simply due to the larger macroeconomic environment and not because of any fundamental weakness.
Two ratios used by Wall Street to get a rough idea of whether a company is undervalued or overvalued are the price to earnings (P/E) and price to sales (P/S) ratios. These take a look at a firm's revenue or earnings and compare them with the share price to determine what is the 'premium' offered by the market over their ability to make money. The P/S ratio is used for firms that are yet to generate a profit, and the P/E ratio is for those that regularly churn out bottom line profits.
The billionaire financial guru Warren Buffett is the most renowned name in the financial industry, and he is at the helm of the holding company Berkshire Hathaway. Berkshire's investment portfolio dwarfs all hedge funds out there, and by the end of this year's second quarter it was worth a staggering $300 billion - which is more than the central bank foreign exchange reserves of most of the world's countries, including the Federal Reserve Bank of the United States ($229 billion) and the Bank of England of the United Kingdom ($178 billion).
Therefore, it's safe to assume that Mr. Buffett is doing something right when it comes to investing, and over the course of his career, his firm has provided 20% average returns, which is more than double the Standard and Poor 500 index's return according to Forbes Magazine. The same magazine also has a net worth estimate for the investor and estimates that as of September 2022, Mr. Buffett was worth a staggering $95.5 billion. This estimate comes after he has donated more than $49 billion to a host of charitable organizations and causes.
In today's piece, we will focus on which companies Mr. Buffett's firm has invested in that are undervalued based on traditional metrics. The top picks on this list are HP Inc. (NYSE:HPQ), U.S. Bancorp (NYSE:USB), and Occidental Petroleum Corporation (NYSE:OXY).
Our Methodology
We sifted through Berkshire Hathaway's second quarter of 2022 portfolio to pick out which firms were trading at price to earnings and price to sales ratios that are lower than industry averages.
10. Liberty Latin America Ltd. (NASDAQ:LILA)
Price to Sales Ratio as of October 17, 2022: 0.35
Number of Hedge Fund Holders: 20
Industry Average P/S: 1.31
Liberty Latin America Ltd. (NASDAQ:LILA) is a fixed mobile and subsea telecommunications services provider. The firm provides video, broadband internet, and other connectivity services to residential and commercial customers. It is headquartered in Hamilton, Bermuda.
Liberty Latin America Ltd. (NASDAQ:LILA) is slated to heavily grow its free cash flow due to crucial mergers, most of which are on track to completion. These will add $100 million, $148 million, and $42 million to the firm's free cash flows in 2023, 2024, and 2025, respectively - above the $100 million that it is slated to bring in this year.
Berkshire Hathaway's second quarter of 2022 investments saw a $20 million stake in Liberty Latin America Ltd. (NASDAQ:LILA) which came through 2.6 million shares. Insider Monkey's Q2 2022 study of 895 hedge fund portfolios outlined that 20 had also invested in the company. Liberty Latin America Ltd. (NASDAQ:LILA)'s P/S ratio of 0.35 is significantly below the industry average of 1.31 - implying that the stock is cheap compared to its peers.
Liberty Latin America Ltd. (NASDAQ:LILA)'s largest investor is William Crowley, William Harker, and Stephen Blass's Ashe Capital which owns 12 million shares that are worth $96 million.
Along with U.S. Bancorp (NYSE:USB), HP Inc. (NYSE:HPQ), and Occidental Petroleum Corporation (NYSE:OXY), Liberty Latin America Ltd. (NASDAQ:LILA) is a great cheap Warren Buffett stock.
9. The Procter & Gamble Company (NYSE:PG)
Price to Earnings Ratio as of October 17, 2022: 21.5
Number of Hedge Fund Holders: 71
Industry Average P/E: 25
The Procter & Gamble Company (NYSE:PG) is one of the oldest and largest consumer packaged goods companies in the world that was set up in 1837 and is headquartered in Cincinnati, Ohio. The firm's products include personal grooming, healthcare, and a host of other products.
The Procter & Gamble Company (NYSE:PG)'s average revenue and non-GAAP earnings have grown by 4.7% and 8.2% annually over the past four years, which is a respectable reading for a firm its age. Additionally, over the past ten years, the firm's dividend has grown by 5.1% annually, and its dividend payments and regular share buybacks make it a good stock to weather a recession. Mr. Buffett's fund owned 315,400 shares of the company that were worth $45 million during the same time period.
The Procter & Gamble Company (NYSE:PG) has a P/E ratio of 21.5, which is lower than the industry average of 25. The firm pays a 91 cent dividend for a 2.92% yield and 71 out of the 895 hedge funds polled by Insider Monkey for their second quarter of 2022 earnings had invested in the firm.
Out of these, Ray Dalio's Bridgewater Associates is The Procter & Gamble Company (NYSE:PG)'s largest investor. It owns 6.7 million shares that are worth $970 million.
8. Johnson & Johnson (NYSE:JNJ)
Price to Earnings Ratio as of October 17, 2022: 23.9
Number of Hedge Fund Holders: 83
Industry Average P/E: 36.2
Johnson & Johnson (NYSE:JNJ) is an American healthcare company that is headquartered in Brunswick, New Jersey. The firm sells a variety of products such as baby care products, pharmaceuticals, and skin and beauty products.
Johnson & Johnson (NYSE:JNJ)'s shares have weathered the beating taken by the NYSE this year, as they are down by a mere 4% year to date. Berkshire Hathaway held a $58 million stake in the company as part of its Q2 2022 portfolio, which came through 327,100 shares. During the same time period, 83 out of the 895 hedge funds part of Insider Monkey's survey had held a stake in the company.
Johnson & Johnson (NYSE:JNJ)'s price to earnings ratio is 23.9, which is well below the industry average of 36.2. The firm also pays a $1.13 dividend for a 2.75% yield, and its latest quarterly dividend hike of 6.6% marked its 60th consecutive year of dividend growth.
Johnson & Johnson (NYSE:JNJ)'s largest investor is Rajiv Jain's GQG Partners which owns 6.5 million shares that are worth $1.1 billion.
Distillate Capital Partners LLC mentioned the company in its Q2 2022 investor letter. Here is what the fund said:
“Johnson & Johnson was among the 2 largest trims at around 1% each. Each stock was up 1% in the quarter compared to the 16% price decline for the S&P 500 and the positions were reduced as the valuations became somewhat less appealing, though still attractive enough to warrant inclusion.”
7. StoneCo Ltd. (NASDAQ:STNE)
Price to Sales Ratio as of October 17, 2022: 2.15
Number of Hedge Fund Holders: 30
Industry Average P/S: 3.07
StoneCo Ltd. (NASDAQ:STNE) is a financial software technology company that is headquartered in George Town, the Cayman Islands. The company's services allow its customers to conduct electronic commerce sales.
Warren Buffett's Berkshire Hathaway owned 10 million StoneCo Ltd. (NASDAQ:STNE) shares that were worth $82 million by the end of this year's second quarter. Insider Monkey's Q2 2022 survey of 895 hedge funds outlined that 30 had also held a stake in the company.
StoneCo Ltd. (NASDAQ:STNE) is Brazil's largest merchant acquirer and it is the only non-bank institution in the country that is licensed by the central bank to operate as a merchant payments acquirer. Its price to sales ratio of 2.15 is lower than the industry average of 3.07.
StoneCo Ltd. (NASDAQ:STNE)'s largest investor after Mr. Buffett is Nitin Saigal and Dan Jacobs's Kora Management which owns 4.6 million shares that are worth $35 million.
Artisan Partners mentioned the company in its Q2 2022 investor letter. Here is what the fund said:
StoneCo Ltd. (Stone) today is seen as a payment provider with lower margins than its peers in a structurally difficult environment in Brazil: strong competition, declining take rates, increasing funding costs. The last two quarterly updates indicated improvement in all business lines for Stone and management did forecast further margin increases throughout all of 2022. In contrast to the other payment providers, Stone also has a sizable software business. In addition, Stone is working towards becoming a full-fledged financial services provider. Both endeavors add costs to the P&L, but do not yet add meaningful profits, which is about to change. Particularly the lending business could become bigger and more profitable than the current bread-and-butter payments business. However, the lending business was suspended last year after experiencing issues that resemble those of the early PayPal from more than two decades ago (“X.com” was renamed “PayPal” in 2001)…” (Click here to see the full text)
6. Ally Financial Inc. (NYSE:ALLY)
Price to Earnings Ratio as of October 17, 2022: 4.12
Number of Hedge Fund Holders: 42
Industry Average P/E: 14.79
Ally Financial Inc. (NYSE:ALLY) is an American financial services company that is headquartered in Detroit, Michigan. Its products include loans, leases, insurance, mortgages, and investment advisory.
Ally Financial Inc. (NYSE:ALLY) has grown its revenues by a compounded annual growth rate (CAGR) of 8% from 2018 to 2021, or from $7 billion to $8.9 billion. At the same time, its net income doubled from $1.5 billion in 2018 to $2.9 billion in 2021. Readers are advised to keep in mind that this growth came during the coronavirus pandemic, which caused industry wide disruptions.
Mr. Buffett's holding company owned a $1 billion stake in Ally Financial Inc. (NYSE:ALLY) during this year's second quarter that saw a 235% quarterly increase and came through 30 million shares. The firm's P/E ratio of 4.12 is well below the industry average of 14.79. Insider Monkey took a look at 895 hedge funds for their June quarter of 2022 holdings to discover that 42 had invested in the company. Ally Financial Inc. (NYSE:ALLY) also pays a 30 cent dividend for a 4.10% yield.
Ally Financial Inc. (NYSE:ALLY)'s largest investor in our database after Berkshire Hathaway is Natixis Global Asset Management's Harris Associates which owns 26 million shares that are worth $896 million.
Oakmark Funds mentioned the company in its Q3 2022 investor letter. Here is what the fund said:
“As for the detractors, fears of a recession have weighed heavily on consumer finance companies, like Ally Financial Inc. (NYSE:ALLY), due to concerns about deteriorating credit quality and used car price declines. Bad debt expense is likely to rise from the unusually low levels we’ve been experiencing, but we believe the company is well-positioned to absorb this normalization. With Ally’s shares trading for just 4x consensus EPS, we believe investors’ fears are already heavily discounted into Ally’s share price, creating an attractive risk/reward proposition.”
Ally Financial Inc. (NYSE:ALLY) joins our list of cheap Warren Buffett stocks, with some of the others being HP Inc. (NYSE:HPQ), U.S. Bancorp (NYSE:USB), and Occidental Petroleum Corporation (NYSE:OXY).
Click to continue reading and see 5 Warren Buffett Stocks That Are Too Cheap To Ignore.
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Disclosure: None. 10 Warren Buffett Stocks That Are Too Cheap To Ignore is originally published on Insider Monkey.
