For more than 57 years, Berkshire Hathaway (BRK.A 0.70%) (BRK.B 0.86%) CEO Warren Buffett has set up a lucrative clinic for Wall Street. Through the end of 2021, the Oracle of Omaha has overseen an average annual return of 20.1% for the company’s Class A shares (BRK.A), nearly double the average annual total return, including dividends paid, for the S&P500 on the same section.
While there’s a long list of reasons for Warren Buffett’s success over nearly six decades, his affinity for buying value stocks tops the list. Instead of pursuing unproven businesses, Buffett has a habit of packing Berkshire Hathaway’s portfolio with highly profitable, proven stocks that can be bought for a reasonably low valuation.
The 10 cheapest stocks currently held by Warren Buffett are listed in ascending order, based on each company’s price-to-earnings (P/E) ratio:
- Allied Financial (ALLY 1.26%): Price/earnings ratio of 4.79
- General Motors (GM 1.95%): 6.38
- HP (HPQ 2.76%): 6.39
- Celanese (THIS 2.63%): 6.92
- Citigroup (VS 1.54%): 7.03
- western oil (OXY 1.75%): 7.88
- Bank of America (BAC 0.84%): 8.93
- DaVita (AVD 1.48%): 8.97
- American bank (USB 1.13%): 8.98
- Chevron (CLC 2.58%): 9.21
Keep in mind that the S&P 500 forward price-to-earnings ratio is closer to 17, as of September 7, 2022. While some industries traditionally trade at multiples below their expected earnings, these 10 Buffett stocks are pretty cheap if they can. meet or exceed Wall Street expectations.
Here are a few things to note when analyzing Warren Buffett’s cheapest stocks.
Cyclical activities fluctuate with the economy
For starters, the Oracle of Omaha likes cyclical companies. By “cyclical” I mean companies that fluctuate with the economy. If the economy is running at full speed, we expect cyclical companies to do well. Conversely, when economic contractions or recessions occur, cyclical stocks are often in trouble. With US gross domestic product declining in consecutive quarters, we currently appear to be in the “flow” part of the business cycle.
For example, automaker General Motors and personal computer company HP are likely priced as cheaply as they are due to the growing likelihood that the US or global economy will enter a recession. Consumers and businesses are less likely to open their wallets and buy new vehicles or computers during times of heightened uncertainty.
However, it is equally important for investors to realize that the US and global economy is spending a disproportionate amount of time expanding versus contracting. Even though recessions and economic downturns are inevitable, cyclical companies with inexpensive valuations and a clear path to growth can benefit from these long periods of expansion. That means General Motors’ push into electric vehicles and the steady operating cash flow generated by sales of PCs and HP printers may still be long-term movers for investors.
Patient investors can find serious bargains among financial stocks
Another thing that probably stands out is that four of Warren Buffett’s cheapest stocks are financial stocks: Ally Financial, Citigroup, Bank of America and US Bancorp.
To echo the previous point, financial stocks are cyclical. When the US economy is booming, banks are busy growing their loan portfolios and generating additional income from deposits. But when recessions hit, bank stocks typically experience an increase in delinquencies and loan write-offs. This forces most banks to set aside capital for loan losses, reducing their short-term profits.
But long-term investors like Warren Buffett have seen these cycles before and fully understand that banks benefit from the natural expansion of the US economy over time.
For example, Bank of America is the most interest rate sensitive of the big banks and should see its earnings per share increase as interest rates rise rapidly. Even if its delinquencies increase in the near term, BofA’s large portfolio of rate-sensitive loans should propel earnings higher.
Likewise, US Bancorp has done a better job than any bank of incentivizing its active users to engage in digital banking. With 82% of users regularly banking online or through a mobile app, the company is able to significantly reduce non-interest expenses and deliver one of the best returns on assets among major banks. These are the types of solid financial stocks that won’t stay “cheap” for long.
Energy stocks could be incredible value
Finally, the only two energy stocks held by Berkshire Hathaway – Chevron and Occidental Petroleum – are among Warren Buffett’s cheapest stocks.
A unique set of circumstances has caused energy commodity prices to skyrocket in 2022. Russia’s invasion of Ukraine, along with reduced drilling and infrastructure investment by oil majors during the pandemic, have created a scenario where shortages of crude oil and natural gas supply drive up spot prices . As a result, oil and natural gas hit multi-decade highs this year and boosted earnings prospects for Chevron and Occidental Petroleum sharply.
The big question mark is whether these historically high commodity prices will continue for years or peter out. While a recession would undoubtedly weigh on crude oil and natural gas prices in the very near term, Russia’s invasion of Ukraine and chronic underinvestment in domestic drilling and infrastructure are not easy-to-solve problems. In other words, it can be said with force that oil stock earnings will remain high for years to come.
Considering that oil stocks are known for their strong capital return programs, these energy stocks could be a good deal.
Bank of America, Citigroup and Ally are advertising partners of The Ascent, a Motley Fool company. Sean Williams holds positions at Bank of America. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares) and HP. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.