In this article we present the list of 10 Best Value Stocks to Buy According to Warren Buffett. Click to jump straight to the 5 Best Value Stocks to Buy According to Warren Buffett.
Warren Buffett, the chairman and CEO of $524 billion holding company Berkshire Hathaway, is a revered investor who has achieved incredible success by sticking to the principles of value investing that he adopted from his teacher and mentor Benjamin Graham.
Our calculations of Buffett’s holdings found that between 1999 and 2017, his stock picks significantly outperformed the S&P 500’s total returns. Their equal weighted average monthly returns came in at 0.97% during that period, crushing the S&P by 0.38 percentage points. Even as value stocks slumped heavily over the last decade, Buffett’s picks continued to outperform the market, topping the S&P by 0.21 percentage points per month on average between 2008 and 2017.
Now just imagine what the Oracle of Omaha could do in a market that actually values value stocks. While that day may not be coming any time soon, we did see the strongest push for value stocks in the last two decades after the first wave of positive coronavirus vaccine news hit in early November.
Warren Buffett of Berkshire Hathaway
At a current P/E of 37.4x, the S&P 500 is more expensive than it’s ever been save for two other points in history: at the height of the tech bubble in the early 2000s, and during the 2009 financial crisis, when it briefly peaked at over 123x. The current figure does need to be given its obvious proper context however, that being that earnings have been heavily, and let’s say unfairly, impacted by the pandemic.
That doesn’t mean there aren’t legitimate warning signs that certain parts of the market have become perilously overvalued, namely growth stocks, whose price-to-sales ratio has now surpassed the levels of their tech bubble peak. Renewables appear to be leading the new bubble, with companies like Plug Power, Inc. (NASDAQ:PLUG), up over 1,000% this year, pricing in several years or even decades worth of growth right now.
Given that backdrop and the unquestionable investing prowess of Buffett during any market conditions, it’s a great time to consider adding some quality value stocks to your portfolio. While there’s no clear definition of what a value stock is, it’s generally regarded as a stock that is trading at a lower multiple than either the market as a whole or its particular industry. We’ll go with the former definition for the purposes of this article.
Only a handful of Buffett’s top stock picks did not qualify as value stocks using that methodology, namely Apple Inc. (NASDAQ:AAPL) and Charter Communications, Inc. (NASDAQ:CHTR). While Apple is generally considered a growth stock anyway, it’s been trading at value stock levels for a long time, including when Buffett first started building a stake in the tech giant back in early 2016. However, Apple’s valuation has now pushed past 40x earnings, eclipsing the S&P’s mark.
The following list of Buffett’s top value stocks is based on Berkshire Hathaway’s latest 13F filing with the SEC for the reporting period of September 30. We pay close attention to Buffett and the hedge fund industry’s top stock picks because our research has uncovered multiple ways to profit from their consensus picks.
Hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Now then, let’s check out the 10 Best Value Stocks to Buy According to Warren Buffett. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10. General Motors Company (NYSE:GM)
Buffett has owned a stake in General Motors Company (NYSE:GM) dating back to early 2012 and has gradually added to the position over the years. He bought another 5.32 million GM shares in Q3, giving Berkshire an even 80 million shares and a 5.5% ownership stake in the automaker.
Buffett praised GM CEO Mary Barra last year for the “sensational” job she has done, which includes successfully modernizing and strengthening its production processes, cutting back on costly overproduction and suboptimal fleet sales to rental companies, and exiting struggling markets. The initiatives have driven GM’s margin expansion higher and lowered the company’s P/E to just over 18x.
9. The Bank of New York Mellon Corporation (NYSE:BK)
BK ranks 9th in our list of the best value stocks to buy. Buffett has been a big fan of banks for decades, and has now owned The Bank of New York Mellon Corporation (NYSE:BK) since 2010. Buffett did trim several of his bank holdings earlier this year, including BK, unloading 10% of his BK shares during Q2 while investing in gold, a signal that the billionaire money manager doesn’t expect a quick economic recovery. Nonetheless, Buffett still owned 72.36 million BK shares, giving him an 8.17% ownership stake in the investment bank, which has a P/E of just under 9x.
8. Verisign, Inc. (NASDAQ:VRSN)
VRSN ranks 8th in our list of the the best value stocks to buy now. Verisign, Inc. (NASDAQ:VRSN) is one Buffett’s lesser-known tech holdings, which he’s owned since late 2012. Other hedge funds are starting to take note of the internet infrastructure and domain name registry company as well, as hedge fund ownership of VRSN has jumped by 84% since the middle of 2018.
Verisign has been highly successful in cutting costs and growing its operating margins in recent years, pushing the latter mark higher by 4.7 percentage points to 65.4% between 2017 and 2019. That has allowed its P/E to hover around 2017 levels of 31x even as the stock has gained 185% since the end of 2016.
7. DaVita Inc (NYSE:DVA)
DVA ranks 7th in our list of the best value stocks to buy now. DaVita Inc (NYSE:DVA) is another longtime holding of Buffett’s, dating back to 2011. He did trim 2 million shares from the position in Q3, leaving Berkshire with a stake of 36.1 million DVA shares and a nearly 30% ownership stake in the healthcare company, which operates about 2,700 dialysis clinics in the U.S.
The company became a target of notable short seller Jim Chanos last year, who characterized its reimbursement model as an insurance scam and at risk of regulatory blowback. The market has thus far disagreed, as DaVita has been one of Buffett’s best performing stocks this year, gaining 54% and currently trades at 18x earnings.
6. U.S. Bancorp (NYSE:USB)
U.S. Bancorp (NYSE:USB) is another one of Buffett’s favorite banks and one of the 10 Best Bank Stocks To Buy Right Now. The billionaire money manager owns nearly 132 million USB shares as of September 30, having trimmed the holding by just 1% this year.
U.S. Bancorp has been hit harder this year than some of Buffett’s other top bank stocks, with shares being down 21%. That’s likely due to its lack of investment banking activities, leaving it with heavier exposure to interest rates and commercial lending. Despite that, USB has actually performed quite well, growing its revenue slightly in Q3 year-over-year and earning $1.40 per share. It trades at about 15x earnings and at a price-to-book of just 1.47x, well below its five-year average of 1.8x.
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Disclosure: None. 10 Best Value Stocks to Buy According to Warren Buffett is originally published at Insider Monkey.
