Warren Buffett is known for being a value investor. The concept of value investing, and fundamental investing generally, is to buy stocks at a discount. If you were to look at Berkshire Hathaway’s holdings today, not every stock is a good investment as a new position. As a result, considerations for the current earnings prospects and valuation need to be considered which would be the best opportunity to buy today. Here are five of the best value opportunities from the holdings of Buffett’s Berkshire Hathaway.
Benjamin Graham is largely considered the father of value investing. He was a mentor and professor for Warren Buffett while attending Columbia University. In fact, Buffet names his first son after Graham, Howard Graham Buffett.
In an article published in the Financial Analyst Journal, Buffett outlined three things he learned from Benjamin Graham. The following are the three things that Buffett learned along with his quote pertaining to the principle.
- Do something foolish
“What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”
- Do something creative
“A remarkable aspect of Ben’s dominance of his professional field was that he achieved it without the narrowness of mental activity that concentrates all efforts on a single end…It was, rather, the incidental byproduct of an intellect whose breadth almost exceeded definition.”
- Do something generous
“I knew Ben as my teacher, my employer and my friend. In each relationship — just as with all his other students, employees and friends — there was an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit…If clarity of thinking was required, there was no better place to go. And if encouragement was needed, Ben was there.”
When you consider valuation, one of the considerations is the actual value compared to a benchmark. That benchmark could be compared to historic valuation ratios, compared to its industry or compared to future earnings (discounted cash flow).
The following five companies represent the best combination of value and appreciation for investors looking to build a portfolio.
Buffet Value Stock #1: Biogen Inc (NASDAQ: BIIB)
One measure of valuation is considering the future cash flows of the company and discounting the future cash flows to the present. The cash flows allow you to arrive at the current value of the company. Identifying companies that are trading at a discount of this value is the objective of value investors. Of all of Berkshire’s current holdings there are only five of them and BIIB is one of them. The stock is currently trading at about a 25% discount. A typical value investor will look for a 30% to 50% discount.
Biogen is a company that has had a history of growth, great margins and is trading near 10-year lows for most of its valuation ratios like P/E, P/B and EV/EBITDA. This positions the company as a blend of value and growth with the stock recently breaking out to the upside on August 7.
Buffet Value Stock #2: Kroger Co (NYSE: KR)
Kroger is trading at a 40% discount to its discounted cash flow value. As a grocery store, the company is a consumer staple company that pays a 2.08% dividend. Most of its valuation ratios are trading below its 10-year median value and was considered an “essential” company during the COVID-19 business closures.
Buffet Value Stock #3: Davita Inc (NYSE: DVA)
Davita is a kidney dialysis company and is trading at the largest discount of any company on our list. The share price is trading at a 57.5% discount and its P/E and P/S ratios are trading below its 10-year median value.
Buffet Value Stock #4: Apple Inc (NASDAQ: AAPL)
Of all the companies on the list, Apple is trading close to its discounted cash flow valuation. At a 2% discount, the company may not appear to be a great opportunity. However, valuation can improve with increased cash flow. Since the most recent earnings report, analysts have positively revised the company’s earnings estimates for the current quarter, next quarter, current year and next year. The increased earnings expectations produce a better valuation as the profits are realized.
Buffet Value Stock #5: Sirius XM Holdings Inc (NASDAQ: SIRI)
Sirius is currently trading at a 44% discount and pays a 0.87% dividend yield. The price closed above its $6 resistance a couple days ago on higher volume. This completes a potential bottoming formation with the potential to retest its 2020 highs.