It's been a challenging year to pick stocks, with all the major indexes falling year to date. When the going gets tough, it can be comforting to look at the holdings of Warren Buffett's Berkshire Hathaway and see that the Oracle of Omaha doesn't sell his favorite stocks just because the markets are down. Buffett has made his shareholders massive returns over the last 50-plus years by holding stakes in great businesses through all kinds of market environments.
Three Motley Fool contributors recently picked three stocks from Berkshire Hathaway's holdings that could be great investments at current prices. Here's why they chose Amazon (AMZN 0.03%), RH (RH -0.83%), and Kroger (KR 0.13%).
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Amazon is growing revenue and profits and is selling at its lowest price in five years
Parkev Tatevosian (Amazon): Amazon thrived at the pandemic onset. Its business was tailor-made to do well when folks avoid shopping in person and need items delivered to their homes. As a result, sales surged by over $100 billion in 2020 and another $80 billion in 2021. Of course, some of the customers it gained will revert to pre-pandemic shopping habits as economies reopen, but millions will remain with Amazon.
The company did an excellent job serving customers and generating brand loyalty amid difficult circumstances. There were a few canceled deliveries, delayed packages, and out-of-stock items, but Amazon delivered for the most part. Because of that, Amazon felt confident raising the price for Amazon Prime. The increase will go a long way in raising operating profits, which have been increasing already. Amazon's operating profit rose from $676 million to $24.9 billion in the last decade. Two of Buffett's favorite characteristics are pricing power and profit growth. It's no surprise, then, that Amazon is a top-25 holding in Berkshire Hathaway's portfolio.
What makes Amazon a screaming buy in March is the favorable price. The stock is down 24% off its high and trading at a price-to-earnings (P/E) ratio of 43.73. That's the lowest P/E Amazon has had in the last five years. An iconic brand with growing profits and an inexpensive price are three reasons that make Amazon an excellent buy in March.
Not your typical furniture store
Jennifer Saibil (RH): In his letter to shareholders at the RH 2021 shareholder meeting, RH CEO Gary Friedman quoted Warren Buffett as saying, "Time favors the well-managed company." That's why, Friedman argues, RH stock has outdone Apple, Alphabet, Amazon, Meta Platforms, and more over the past five years. That's pretty impressive for a niche furniture retailer. Buffett favors undervalued companies, and trading at a trailing-12-month price-to-earnings ratio of only 15, RH could be a value investor's dream stock.
RH, formerly Restoration Hardware, sells luxury furnishings through its small group of stores in upscale areas as well as its digital channel. It's been very successful in its strategy of offering expensive and exclusive full-priced products geared at a niche market, with an innovative approach that includes creating museum-like galleries to showcase its merchandise.
Unlike other home improvement companies, which soared at the beginning of the pandemic, RH's sales suffered when people cut back on luxury spending. But it's made a comeback, and in the third quarter of 2021, revenue increased 19% year over year and crossed $1 billion for the first time. Margins also expanded, and net income increased 25% to $209 million. That performance was also in the face of pressure from supply chain backups, which delayed the launch of its new collection and the openings of several new galleries.
That means the company has several new initiatives on the horizon to feed demand, in addition to the ones planned for later in the year, including new galleries in Paris, London, and other major European cities. These carefully planned and curated locations help differentiate the company's model and should provide a huge sales boost when they finally open, not to mention serve as a long-term revenue stream as the company expands.
This isn't a typical Warren Buffett financial powerhouse, but it's a company growing double-digits with a low valuation whose stock price should increase. The average Wall Street analyst consensus is for the price to increase more than 100%, making now the ideal time to buy.
Boring can be very rewarding
John Ballard (Kroger): Investing in a grocery stock might not sound very exciting, but investors should check out Kroger's stellar year-to-date performance. The stock is up 22% since the beginning of the year, which trounces the 12.4% decline in the S&P 500 index. The good news is that the stock is still relatively inexpensive compared to the average stock.
The average company that makes up the S&P 500 trades at a price-to-earnings (P/E) ratio of 22 based on forward earnings estimates for 2022. But Kroger trades at a forward P/E of 14.5. There's definitely a sale happening at the leading grocery chain.
The company has invested in what it sees as a competitive advantage spanning its pickup and delivery service, specialty fresh produce, new fulfillment centers, and better pricing and personalization. In the fourth quarter, new customer acquisitions through pickup and delivery grew 25% over the third quarter. The momentum here is a strong indicator of Kroger's ability to keep growing, since customers who use digital services spend more across the business.
Another good indicator is that Kroger continues to raise its dividend. Last year, the dividend increased by 16.7% to a quarterly payment of $0.21, bringing the current yield to 1.47%. The current payout is less than 20% of free cash flow, which has nearly doubled over the last year. With the company enjoying growth in sales and profits in this inflationary environment, investors might want to take advantage of the relatively low P/E multiple and grab a Berkshire-approved bargain.
