Berkshire Hathaway CEO Warren Buffett is known for astute investments that have helped his company generate stronger returns than the broader market over the years. So it wasn’t surprising to see that Class A shares of his holding company outperformed the S&P 500 handsomely in 2022.
With the stock market expected to go on a bull run this year, now would be a good time to take a look at two Buffett stocks that started 2023 on the right foot. Shares of Taiwan Semiconductor Manufacturing (NYSE: TSM) (popularly known as TSMC) and Floor & Decor (NYSE: FND) have shot up 28% and 25%, respectively, so far this year. Let’s look at the reasons why these two stocks could soar higher and see why they are still worth buying despite their recent gains.
1. Taiwan Semiconductor Manufacturing
TSMC stock’s impressive rise in 2023 may seem a tad surprising given the company’s fourth-quarter 2022 results released on Jan. 12. Though the Taiwanese foundry giant delivered impressive year-over-year growth with a 27% increase in revenue to $19.9 billion and a 58% jump in earnings to $1.82 per share, the guidance was disappointing.
TSMC’s revenue guidance of $17.1 billion for the current quarter would translate into a small year-over-year decline. Moreover, analysts don’t expect the company to replicate its terrific 2022 growth this year as its revenue is forecast to remain mostly flat. Earnings per share, however, is expected to shrink to $5.75 in 2023 from $6.60 last year.
But a closer look at TSMC management’s comments on the latest earnings conference call explains why the stock price headed north despite a tepid near-term outlook (which management attributed to the softness in the semiconductor industry). Semiconductor sales are expected to decline 3.6% in 2023 following a 4% increase last year. As a result, TSMC’s customers are reportedly reducing chip orders to align their inventories with the end-market demand.
But TSMC is seeing “initial signs of demand stabilization” and expects the market to stage a healthy recovery in the second half of 2023. At the same time, the company anticipates decent demand for chips based on its 3-nanometer N3 node. TSMC points out that its N3 chips are already in volume production and their demand is exceeding supply.
The 3-nm chips will start contributing to TSMC’s revenue in the third quarter of the year, which is not surprising given the company already has a solid lineup of customers who will be deploying them. Throw in potential catalysts such as the automotive and data center markets, there is a chance that TSMC may be able to deliver stronger-than-expected growth in 2023.
There is still a shortage of chips used in the automotive industry, which means that semiconductors made by TSMC for application in this industry should continue to be in strong demand. Meanwhile, spending on data center systems is anticipated to increase by 3.4% in 2023. Additionally, the Internet of Things (IoT) chip market is expected to clock robust annual growth of 15.5% from 2023 to 2027, opening another opportunity for TSMC to outperform expectations.
All told, there are multiple pockets of growth within the semiconductor market that could help TSMC outperform Wall Street’s expectations. And with the stock trading at 14 times trailing earnings, it isn’t too late to buy this semiconductor stock, as it is still trading at a discount to the S&P 500’s multiple of 19.
2. Floor & Decor
Berkshire Hathaway holds a 4.5% stake in Floor & Decor, a multichannel specialty retailer and distributor that sells hard-surface flooring such as tiles, laminates, wood, wall tiles, and other related items. Floor & Decor operates 178 warehouse-format stores across 35 states in the U.S. It also has five design studios.
The company is seeing healthy demand for its products recently. In the third quarter of 2022, Floor & Decor’s revenue increased 25% year over year to $1.1 billion. Its adjusted earnings were up 17% year over year to $0.70 per share. Floor & Decor’s solid quarterly growth was driven by a combination of new store openings and an increase in comparable-store sales.
It opened four warehouse stores in Q3 2022. Comparable-store sales rose 11.6% year over year, which means that stores that have been open for more than a year continue to perform well. The company’s 2022 revenue guidance of $4.27 billion would translate into healthy growth of 24% over 2021. Analysts expect Floor & Decor to sustain its momentum in 2023 as well, with a 15% increase in revenue and a 12% jump in earnings per share.
It is not surprising to see why Wall Street is expecting another solid year from the company. Floor & Decor estimates that its total addressable market opportunity is worth $49 billion to $54 billion, including the hard-surface flooring market and adjacent categories. This explains why the company is busy expanding its footprint and cornering a bigger chunk of the market it operates in. It was planning to open 13 new stores in the final quarter of 2022, over triple the count in the preceding quarter.
Floor & Decor’s expansion strategy reportedly helped it increase its market share to 8% in 2021 from 6% earlier. What’s more, the company aims to take its store count to 275 by 2024 as compared to 191 in 2022, and it also sees the potential for 500 stores in the U.S. in the long run. The size of the addressable market and Floor & Decor’s focus on making the most out of it suggests that it is built for long-term growth. It is expected to clock annual earnings growth of more than 19% over the next five years.
Even better, investors have a great opportunity to buy this Buffett stock right now, as it is trading at 27 times forward earnings, which is a discount to its five-year average forward price-to-earnings ratio of 40. It would be a good idea to buy Floor & Decor while it is still trading at a relatively cheap valuation since the stock could sustain its impressive momentum for the remainder of the year and fly higher in the long run.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.