3 Warren Buffett Stocks That Scream November Buys
The investment history of Berkshire Hathaway (BRK.A -1.52%) (BRK.B -1.51%) CEO Warren Buffett suggests he might know a thing or two about the stock market and identifying value. Since taking over the helm of Berkshire in 1965, he has created approximately $660 billion in value for shareholders (himself included) and achieved a staggering average annual return of 20.1% for class equities. A of his company (BRK.A).
Given the success of the Oracle of Omaha for more than half a century, everyone, from professional investors to ordinary investors, pays close attention to what they buy and sell in the investment portfolio of Berkshire Hathaway.
Buffett’s portfolio is also a great place to start when looking for stock buy ideas during a bear market recoil. Although Berkshire Hathaway holds about four dozen stocks in its investment portfolio, three Warren Buffett stocks stand out as glaring daily buys in November.
Johnson & Johnson
The first Warren Buffett stock just begging to be bought as we approach the home stretch of 2022 is the healthcare juggernaut Johnson & Johnson (JNJ -0.52%), or J&J for short. Although J&J is struggling with poor investor sentiment, it is a company that continues to fire full steam ahead.
Health stocks are one of the smartest places to put your money to work during a bear market. No matter how poorly the US economy performs or how negative investor sentiment evolves, we don’t have the ability to control when we get sick or what disease(s) we develop. There will always be a demand for prescription drugs, medical devices and healthcare services, which means J&J is mostly inflation and recession proof.
Although a stronger US dollar is hurting sales for multinational companies like Johnson & Johnson, a deeper dive reveals that all is well from an operational standpoint. Excluding exchange rate fluctuations, sales in the pharmaceutical and medical technology (MedTech) segments were up 10.2% and 6.6% respectively in the first nine months of 2022.
One of the main reasons J&J has been able to deliver adjusted single-digit sales growth and earnings growth for so long is its diversified operating sectors. For example, the company has focused on higher-margin drug sales over the past decade. But because brand-name drugs have relatively short sales exclusivity periods, the company can rely on its MedTech segment to pick up the slack when certain therapies face competition from biosimilars or generics.
Another reason why J&J is such a solid investment is its return on capital program and balance sheet. Johnson & Johnson has increased its basic annual dividend for 60 consecutive years and is one of only two publicly traded companies which has the highest credit rating (AAA) issued by Standard & Poor’s, a division of S&P Global. J&J’s credit rating is higher than that of the US federal government.
At a time when investors are looking for security and valueJohnson & Johnson’s forward price-to-earnings ratio below 17 and dividend yield of 2.6% stand out as a beacon.
A second Warren Buffett stock that is a screaming buy in November is American bank (USB -0.96%), the parent company of US Bank. Despite recession fears weighing on cyclical sectors, such as financials, US Bancorp is one of the few financial stocks positioned to thrive, even in a difficult economic environment.
The Federal Reserve’s monetary policy is one of the biggest tailwinds for bank stocks right now. Normally, a weaker economy and/or a plummeting stock market would encourage the country’s central bank to ease interest rates or offer some form of quantitative easing measures. But with inflation hitting four-decade highs in June, the Fed had no choice but to aggressively raise rates in a bear market.
Banks with floating rate loans outstanding benefit through increased net interest margin and higher net interest income. In the case of US Bancorp, its net interest income jumped nearly 21% year over year in the quarter ended August.
Another important factor working in favor of US Bancorp is the fiscal prudence of its management team. During the financial crisis between 2007 and 2009, most money banks were beset by riskier derivative investments they had made which eventually backfired.
US Bancorp has largely avoided this mess thanks to its focus on what I call the bread and butter of banking: loan and deposit growth. Although loan and deposit growth is not necessarily an exciting operating model, it is a profitable model for US Bancorp that has led to superior return on assets compared to other major banks.
US Bancorp is also setting the standard in digital engagement. At the end of August, 82% of the company’s total active customers were banking online or through a mobile app. Equally important, 62% of loan sales were made digitally. For banks, digital sales cost a fraction of the cost of face-to-face or phone interactions. This large digital presence has allowed the company to consolidate some of its branches and minimize increases in non-interest expenses.
Investors have the opportunity to buy one of the best managed banks on the planet for less than 9 times future earnings, and they will receive a 4.5% annual dividend yield for their patience. It’s a steal.
The third Warren Buffett stock that is a screaming buy in November is FAANG Stock Amazon (AMZN -0.94%). Although the company’s third-quarter operating results signaled near-term difficulties, Wall Street and investors seem to ignore the key performance indicators that matter most.
For most investors and consumers, Amazon’s dominant online marketplace is what comes to mind when the name “Amazon” comes up. This year, Amazon is expected to generate more U.S. online retail revenue than its 14 closest competitors, combined. However, retail demand is slowing as high inflation bites into the pockets of low-income workers, which is why the company’s fourth-quarter sales forecast largely missed the mark.
But even though Amazon’s online marketplace is its biggest revenue generator, it’s not a particularly big segment in terms of operating cash flow. Online retail margins are generally very low. It’s more of a business higher margin trio Amazon Web Services (AWS), advertising services, and subscription services that are critical to growing operating cash flow.
Cloud infrastructure segment AWS accounts for nearly a third of global cloud service spending, according to Canalys. Cloud growth is still in its infancy, and the high margins associated with the cloud generate significant operating revenue for Amazon. In the first nine months of 2022, AWS accounted for 16% of the company’s net sales, as well as all of its operating profit (as retail segments generated operating losses).
Likewise, subscription services (e.g. Prime) and advertising services are seeing double-digit growth. Excluding currency fluctuations, subscription services and advertising services sales increased 14% and 30%, respectively, in the last quarter. The segments that really matter to Amazon’s cash flow are doing very well.
This brings me to the last point: Amazon’s cash flow. Although earnings per share is a common tool used by investors to value publicly traded companies, it works poorly with Amazon, given that the company reinvests most of its operating cash flow back into the business. During the 2010s, investors voluntarily paid a median year-end multiple of 30 times cash flow to own Amazon stock. You can buy stocks today for about 9 times the cash flow that Wall Street predicts for the company in 2025. That’s incredibly cheap for a winner like Amazon.