Warren Buffett is one of the greatest investors of our time and his company Berkshire Hathaway (BRK.A 0.99%) (BRK. B 1.08%)beats the regularly S&P500, a broader benchmark for the market, on annual performance. One way Buffett and Berkshire can do this is through Berkshire’s massive $345 billion stock portfolio that Buffett and the rest of his team buy and sell select stocks from.
Buffett has long been known as a value investor. He tries to find stocks that are trading below their intrinsic value that the market has missed or simply ignored. Value investors believe that if the market wakes up and takes notice, these stocks will do well over time.
Given how successful Buffett has been with this strategy, let’s take a look at five value stocks the Oracle of Omaha currently owns and see if they’ve helped his company succeed.
Known as the original Silicon Valley startup, hp (HP 3.15%) has been manufacturing computers and printers for decades. While the company may not be seen as the innovator it once was, HP has become a stock traditional investors have warmed to for the reason that it prints lots of cash earnings and uses that to pay shareholders.
For fiscal 2022, HP is forecasting free cash flow of between $3.2 billion and $3.7 billion. The company is also on track to return more than $5 billion to shareholders through dividends and share repurchases in the current fiscal year. With an annual dividend yield of nearly 3.4%, HP stock trades at just over five times earnings.
After investing in nearly every other major U.S. bank over the past few decades, Buffett and Berkshire acquired a nearly 3% stake in the embattled bank Citigroup (C 0.85%) earlier this year. Citigroup is an obvious value play, as its shares trade at just 60% of their tangible book value, or net worth. Shareholders are right to question the stock as the company grapples with regulatory issues surrounding its risk management and internal controls, and after years of lagging returns.
But now CEO Jane Fraser, who acquired Citigroup in early 2021, has embarked on a major transformation plan that includes selling most of the bank’s international retail businesses. This will make the bank simpler and focus on better performing companies. Citigroup still has work to do, but if management can sort out the regulatory issues and create a more focused operation, it should be quite feasible to return to full tangible book value. While Buffett waits, Citigroup is paying an annual dividend yield of over 4%.
3. Kraft Heinz
The multinational food and beverage company Kraft Heinz (KHC 0.93%) is often cited as Buffett’s biggest mistake. Berkshire teamed with 3G Capital in 2013 to buy Heinz for $23 billion. They would eventually merge the company with Kraft in 2015, at which point shares opened around $71.
Today, shares are $38, so Berkshire lost a lot of money on the investment. Still, Berkshire still owns more than 26% of the company. Kraft Heinz still has nearly $19.3 billion in long-term debt, but management has made some serious progress in reducing that debt, growing free cash flow in recent years, and it also pays a dividend yield of more than 3%.
4. Financial ally
The great digital consumer bank ally finance (ALLIES -0.80%), which specializes in auto loans, is another bank that Buffett buys shares in while its book value is below tangible value, and that pays a very healthy dividend yield of about 4.6%. Ally launched in 2020 and 2021 when chip shortages and lack of auto inventory led to high auto prices and tremendous demand, particularly for vehicles, allowing Ally to greatly grow its retail auto loan book.
But investors are now worried about loan losses as consumer finances are stretched and just as many expect a recession next year. Ally still makes auto loans — and at very high rates of return — and management appears to be taking a conservative approach to lending. If loan losses don’t beat management’s expectations, then I would suspect Berkshire has a winner here.
5. Jefferies Financial
Berkshire recently announced its small purchase of shares in the investment bank Jefferies Financial (JEF 0.80%) during the third quarter. Similar to Citigroup and Ally, Jefferies is attractively valued and is trading just above tangible book value. The bank also pays out more than 3% dividend yield.
The broader investment banking sector has struggled this year as subscriptions to stocks and bonds slowed significantly amid falling stock valuations and market volatility. But Jefferies is reportedly gaining market share, and Berkshire and Jefferies own a mortgage business together, so Berkshire probably got to know management pretty well.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Ally is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Jefferies Financial Group. The Motley Fool recommends The Kraft Heinz Company and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.