There are few, if any, investors more respected on Wall Street than Berkshire Hathaway CEO Warren Buffett. The reason lies in the successes of the Oracle of Omaha since it took the reins in the mid-1960s.
It took the broad-based S&P 500 until last year to top a cumulative total return of 30,000%, including dividends. However, since Buffett became CEO of Berkshire Hathaway, the Oracle of Omaha has generated a total return on his company’s Class A shares (BRK.A) of more than 4,700,000% in less than six decades (as of January 26, 2024). Returns like this are bound to draw a following from both professional and everyday investors.
The great thing about Warren Buffett and the $371 billion investment portfolio he manages at Berkshire Hathaway is the transparency that comes with it. Thanks to Forms 13F filed quarterly with the Securities and Exchange Commission, investors have been able to effectively replicate Buffett’s trading activities for decades.
The other notable aspect of Berkshire’s $371 billion portfolio is that it is full of profitable, proven companies. In other words, it is a meeting point for top-notch investment ideas.
As we approach the shortest month of the year, three Warren Buffett stocks stand out as best sellers.
Sirius XM Holdings
The first Buffett stock to buy in February is satellite radio operator Sirius XM Holdings (NASDAQ: SIRI). Berkshire’s portfolio added more shares of Sirius XM in the third quarter after a roughly two-year absence.
Radio companies’ biggest concern is the health of the advertising market. Advertising spending is highly cyclical and companies are not afraid to cut their advertising budgets when the first signs of problems become apparent. With some forecast indicators and money-based metrics providing ominous warnings for the U.S. economy, the potential for a challenging year exists.
On the other hand, Sirius XM Holdings is structured differently than terrestrial and online radio operators, giving the company a number of distinct competitive advantages in virtually any economic climate. To start with the most obvious difference: Sirius XM is the only legally authorized satellite radio operator. While this doesn’t mean it’s locked out of competition, it does give the company superior pricing power in its subscription services.
I would argue that the most important difference between Sirius XM and traditional operators is the way they generate revenue. Terrestrial and online radio companies rely heavily on advertising revenue. In the first nine months of 2023, Sirius generated its net sales.
As previously mentioned, companies will quickly cut their advertising budgets at the first sign of economic disruption. Among Sirius Subscribers During an economic downturn, Sirius XM would be in far better shape than its competitors.
Another quick point is that some of Sirius XM’s output is very predictable. Although royalties and talent acquisition costs fluctuate from quarter to quarter, broadcast and equipment costs remain virtually stable. The company can continue to add subscribers without increasing these core costs.
Lastly, Sirius XM’s forward price-to-earnings (P/E) ratio of 17 is at a decade low and represents about a 20% discount to its five-year average.
Bank of America
A second Warren Buffett stock that’s a big buy in February (and beyond) is banking giant Bank of America (NYSE: BAC). “BofA,” as the bank is more commonly known, is Berkshire Hathaway’s second-largest holding by market value.
The downside to bank stocks is that they are cyclical. They will fluctuate with the health of the US economy. If predictions of a recession in 2024 prove accurate, bank stocks like BofA would be expected to see an increase in loan defaults and defaults.
If I can offer any consolation, it is that the economic boom-bust cycle is disproportionate. Although recessions are a normal and inevitable part of the economic cycle, they do not last long.
Only three of the twelve recessions since the end of World War II lasted at least twelve months, while none of the remaining three lasted longer than 18 months. In comparison, in the last 78 years, two expansion periods reached the ten-year mark. Bank stocks are perfectly positioned to grow their loan and leasing portfolio over long periods of time.
One of the main reasons Bank of America has been such a successful investment is its sensitivity to interest rates. No U.S. money center bank’s net interest income is more sensitive to changes in monetary policy than BofA. As the Federal Reserve conducted its most aggressive rate hike cycle in four decades, Bank of America benefited in the form of a higher net interest yield and billions of dollars in additional net interest income each quarter.
When most investors think of Bank of America, they probably don’t associate it with technological advancements. However, in the fourth quarter of 2023, 75% of all consumer households banked digitally (online or via mobile app). In addition, almost half of all loan sales were conducted via digital channels.
Online and mobile app-based transactions cost banks a fraction of what face-to-face interactions require. As the proportion of digital users increases, BofA has the opportunity to consolidate some of its branches and reduce costs.
Bank of America’s valuation also makes a lot of sense for long-term, value-oriented investors. Shares can be purchased for a little less than 10 times future annual earnings and are close to their book value. Buying well-run bank stocks at or below book value has historically been a smart move for investors.
Coca-Cola
The third Warren Buffett stock to outperform its peers in February (and most likely in the coming years) is beverage giant Coca-Cola (NYSE: KO).
Every publicly traded company faces headwinds, and Coca-Cola is no exception. The biggest challenge for the 138-year-old company is dealing with above-average inflation rates. As labor, transportation, and even ingredient costs rise, there’s a chance that Coca-Cola’s operating margin could come under pressure.
The good news here is that Coca-Cola also has exceptionally strong pricing power. According to Kantar’s annual Brand Footprint report, co*ke has been the most chosen brand on retail shelves for 10 years in a row (as of 2022). The company has had little trouble pricing above the prevailing inflation rate.
One of Coca-Cola’s not-so-subtle secrets to its success is its almost unparalleled geographic diversity. The company is present in all but three countries (North Korea, Cuba and Russia) and has more than two dozen brands in its portfolio, generating over $1 billion in annual sales. This means the company brings in predictable cash flow from developed markets while enjoying an organic growth spurt from faster-growing emerging markets.
Additionally, the company expects its addressable market to have doubled from $650 billion in 2017 to an estimated $1.3 trillion in 2022. While established categories (e.g. carbonated soft drinks) offer mid-single-digit compound annual growth rates (CAGRs) through 2026, energy drinks and ready-to-drink alcoholic beverages may achieve high-single-digit CAGR over the same period.
Also, don’t forget about Coca-Cola’s world-class marketing. The company invests more than half of its advertising budget in digital channels and relies on artificial intelligence (AI) to tailor ads to younger audiences. Conversely, the company can draw on its former holiday partners and well-known brand ambassadors to connect with mature consumers. Marketing is a big reason why Coca-Cola is the most valuable consumer goods brand.
This leads to my next point: Consumer staples stocks offer predictable operating cash flow. Food and drinks are a basic need, which means cola performs well in any setting.
Coca-Cola shares can currently be purchased for 21 times forward annual earnings, which is a six-year low and slightly below the five-year average.
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