Few investors have run circles around Wall Street quite like Berkshire Hathaway (BRK.A -0.56%) (BRK.B -0.46%) CEO Warren Buffett. Since ascending to the CEO role in 1965, he’s led his company’s Class A shares (BRK.A) to an aggregate return of more than 3,800,000% through this past weekend. With returns like these, it’s no wonder new and tenured investors alike pay close attention to what the Oracle of Omaha is buying, selling, and holding.
Buffett’s investment portfolio can be a particularly smart place to begin your research when looking for new stock ideas. And since every bear market is eventually cleared away by a bull market rally, now is as good a time as any to put your money to work.
Among the roughly four dozen securities held in Berkshire Hathaway’s portfolio, there are three Warren Buffett stocks that can confidently be bought hand over fist in February.
Johnson & Johnson
The first surefire Buffett stock that’s begging to be bought by opportunistic investors in February is healthcare conglomerate Johnson & Johnson (JNJ 0.87%). Even though J&J, as Johnson & Johnson is more commonly known, is one of Berkshire Hathaway’s smallest holdings by market value, it’s one of the most rock-solid businesses on the planet.
One reason established healthcare stocks make for such smart buys is the defensive nature of the sector. Since no one can control when they get sick or what ailment(s) they develop, there’s always going to be a need for prescription drugs, medical devices, and healthcare services in any economic environment. This demand predictability is one of the reasons J&J delivered 35 consecutive years of adjusted operating earnings growth leading up to the COVID-19 pandemic.
For more than a decade, Johnson & Johnson has been shifting its revenue mix toward faster-growing and higher-margin pharmaceuticals. The only downside to this strategy is that brand-name drugs have finite periods of sales exclusivity. To avoid potential patent cliffs where revenue could tumble, J&J has invested aggressively in its internal innovation, undertaken numerous collaborations, and made a handful of acquisitions.
What’s more, Johnson & Johnson’s industry-leading medical technology segment is well positioned to grow over the long run as the global population ages and gains access to preventative care. This MedTech segment should further hedge the loss of sales exclusivity in brand-name therapies over time.
Investors would also struggle to find a more financially sound company than Johnson & Johnson. Out of the thousands of publicly traded companies, there are only two that have a AAA credit rating from Standard & Poor’s (S&P), a division of S&P Global. J&J is one of those two companies. Based on its credit rating, S&P has more confidence that Johnson & Johnson can service and repay its outstanding debt than it does of the U.S. government (AA rating) doing the same.
J&J has increased its base annual payout for 60 consecutive years (currently a 2.7% yield), and shares can be purchased for an incredibly reasonable multiple of 16 times Wall Street’s consensus earnings for 2023.
Bank of America
The second Warren Buffett stock that can confidently be bought hand over fist in February is Berkshire Hathaway’s second largest holding, Bank of America (BAC 1.03%).
To be perfectly blunt, discussing bank stocks as a compelling buy when a lot of signs indicate a U.S. recession is likely within the next 12 months is odd. Normally, the Federal Reserve will shift to a dovish monetary stance and lower interest rates when a recession takes place or a serious decline hits Wall Street. Doing so lowers the net-interest, income-earning potential of banks. Furthermore, recessions almost always lead to a rise in loan losses, or at the very least loan-loss provisions, for money-center banks like Bank of America (BofA). But this time truly is different for BofA and most of its peers.
Thanks to a 40-year high inflation rate of 9.1% in June 2022, the nation’s central bank has turned its attention solely to taming rising costs. With interest rates climbing at the fastest pace in four decades, BofA recognized $3.3 billion in additional net-interest income during the fourth quarter from the prior-year period.
Additionally, the company estimates it could generate $3.8 billion more in net-interest income with a 100-basis point parallel shift in the interest rate yield curve. In other words, the benefit of higher interest rates is more than outweighing loan-loss provisions and loan losses tied to economic weakness. BofA and its peers could grow their earnings per share even during a possible recession.
Bank of America’s digitization efforts are absolutely crushing it as well. Approximately 73% (44 million) of its verified digital users are actively banking online or via mobile app, with 49% of total sales completed digitally in the December-ended quarter. As more people shift their banking habits online, Bank of America has been able to consolidate some of its physical branches. The result has been a steady improvement in the efficiency ratio of its consumer banking segment.
Investors have the opportunity to pick up shares of Bank of America right now for about 10 times Wall Street’s forecast earnings in 2023 and will collect a market-topping 2.5% yield for their patience.
The third Warren Buffett stock to buy hand over fist in February is none other than FAANG stock Amazon (AMZN 1.48%).
E-commerce giant Amazon certainly doesn’t fit the mold of the typical Buffett stock, and that’s because it was purchased by one of the Oracle of Omaha’s investing lieutenants, Todd Combs or Ted Weschler, and not Buffett. Despite having a nosebleed price-to-earnings (P/E) ratio, Amazon has catalysts galore that should excite investors.
Although Amazon generates most of its revenue from its world-leading online marketplace, it’s wrong to think of Amazon as just as online retailer. Very little of the company’s operating income derives from this low-margin segment. Instead, it’s Amazon’s three high-margin ancillary operations that are critical to its future. I’m talking about Amazon Web Services (AWS), advertising services, and subscription services.
Cloud infrastructure service provider AWS is, without a doubt, Amazon’s most important operating segment. It’s consistently been among the company’s fastest growing divisions, is still benefiting from early-cycle enterprise spending, and generates incredibly high margins. Even though AWS accounts for around a sixth of Amazon’s net sales, it’s consistently responsible for more than half of the company’s operating income.
Likewise, Amazon has utilized the popularity of its online marketplace to net more than 200 million Prime subscribers. Mind you, this figure is as of April 2021, and Amazon’s exclusive rights to Thursday Night Football have assuredly pushed this figure higher. Subscription services generate predictable operating cash flow for the company.
This brings me to the final point: Valuing Amazon with traditional fundamental metrics doesn’t make sense. Because it reinvests so much of its operating cash flow back into the business, Amazon’s price-to-cash-flow (P/CF) ratio is a far better tool to gauge value with this company.
After trading between a year-end cash-flow multiple of 23 and 37 throughout the 2010s, Amazon is currently valued at a little over 9 times Wall Street’s forecast cash flow in 2025. As AWS, advertising services, and subscription services grow into a larger percentage of Amazon’s total sales, the company’s operating cash flow can skyrocket. That makes it an intriguing value right now.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon.com and Bank of America. The Motley Fool has positions in and recommends Amazon.com, Bank of America, Berkshire Hathaway, and S&P Global. The Motley Fool recommends Johnson & Johnson and 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.