To get a leg up on average returns, many investors follow what Wall Street's best and brightest are doing. And why not? Many of them have been beating the market for decades.
However, rather than blindly following someone else's lead, it's important to make an informed decision. After all, the time horizon for one investor may not match your own. Nevertheless, if you're looking for good ideas to sort through, Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), Carvana (NYSE:CVNA), and Under Armour (NYSE:UAA)(NYSE:UA) are three stocks Wall Street is buying that you may (or may not) want to follow.
One of the world's greatest living investors is buying his own company
Chuck Saletta (Berkshire Hathaway): Warren Buffett has earned a spot among the ranks of the world's greatest investors through decades of market trouncing returns at the helm of Berkshire Hathaway. When word got out that Buffett boosted the share buyback at Berkshire Hathaway by about $1 billion, it helped send that company's stock upward.
After all, a share buyback indicates that Buffett thinks that Berkshire Hathaway itself represents one of the best available in the market today. On the surface, there's a case to be made for that optimism. Berkshire Hathaway trades at around 8.4 times its trailing earnings and at a reasonable 1.4 times its book value, neither of which looks terribly aggressive, particularly compared to the overall market.
The risk, however, is that over the decades, Buffett himself has become synonymous with Berkshire Hathaway. At 88 years old, he's clearly closer to the end of his career than the beginning. While he has no plans to retire anytime soon, the market has reason to worry about his departure in the not-too-distant future.
So the question becomes: Do you trust his successor to be a strong investor as well? Two people have bubbled to the top of the list of likely successors, Ajit Jain and Gregory Abel. While one or both of them will likely have Buffett's huge shoes to fill, they don't necessarily need his specific genius to make Berkshire Hathaway a reasonable investment today. After all, both its insurance business and its non-insurance operations generally generate tons of cash, and that will likely continue after Buffett is gone.
As a result, like most Buffett investments, it's probably not a bad idea to follow him into buying Berkshire Hathaway. After all, the market is offering a good price for one of the world's greatest companies -- exactly the sort of long-term, value-generating ideas sought by value investors.
An attractive growth story
Daniel Miller (Carvana): Very few consumers, if any, enjoy the traditional car-buying process and the time that it drains from one's life. That's why the smartest people on Wall Street are taking a look at Carvana, an e-commerce platform for buying and trading vehicles. Carvana offers consumers a seamless way to research vehicles, receive financing, and buy a vehicle in as little as 10 minutes online. Consumers can even opt to have the vehicle delivered to their doorstep or pick it up at the nearest automated vending machine.
The best news for potential investors is that business has been thriving. Take its recent third quarter for instance: It grew retail units sold by 116%, compared to the prior year, revenue by 137% and gross profit by 181%. To be clear, this wasn't a one-hit wonder. The third quarter was Carvana's 19th consecutive quarter of triple-digit unit and revenue growth, and it's likely to notch its 20th consecutive quarter when it caps off 2018.
Carvana is stepping on the gas pedal by launching into 13 new markets during the third quarter. For context, at the end of 2016, it only had 21 total markets. At the end of 2018, it will end up in approximately 84 markets and will continue to expand its footprint across the United States -- as it currently serves just 55.8% of the population -- so there's room for growth and scale.
However, Carvana is still losing money, and its bottom-line loss widened during the third quarter, simply because expansion is expensive. But if you dig into the details, you'll find that management has done an excellent job of increasing inventory while reducing inventory turn time, improving its gross profit per unit, and decreasing its customer acquisition cost. Essentially, it's becoming a fine-tuned machine that is entering more markets more efficiently, and its top-line growth has proven impressive. That's why Carvana is worth a look and why some of the smartest people on Wall Street have taken notice as its stock soared over 282% since its April 2017 IPO.
Second thoughts on sports apparel
Nicholas Rossolillo (Under Armour): The sports apparel company has been upgraded by multiple Wall Street analysts this year on optimism that sales growth will pick up pace and that profitability will return. As a result, Under Armour shares have rebounded nearly 50% in 2018 after getting pummeled over the past two years. I'm going to strike a more cautious tone on this stock, though.
It's true that Under Armour's flagging sales in North America might have turned a corner, propped up by inventory reduction and new product launches in the apparel industry over the course of the last year. That has helped sports outfitter rival Nike's sales rebound in 2018, and many see Under Armour following suit. Plus, international expansion is still on the rise; Under Armour expects revenue outside of the U.S. to finish the year up 25% compared with 2017, helping the company achieve 3% to 4% overall sales growth.
A lot is riding on those expectations, however, and I have serious doubts about the company being able to deliver. According to the U.S. Census Bureau, overall retail sales for the U.S apparel industry are up 5% through October. Under Armour's are down 0.3% in North America, including a 1.6% decline during the third quarter. If the company can't make hay while the sun is shining, when will it? With the American economy now showing signs of slowing down, I'm not sure Under Armour's expected sales about-face is going to happen.
Let's say it does happen, though. Much of that expectation is already priced in. One-year forward price to earnings currently sits at a whopping 61.2. Paying for many decades' worth of profits for a company that is stuck in neutral may not be the best idea. Though some Wall Street pros are feeling confident, tread lightly with this sports apparel stock -- at least for the time being.
Chuck Saletta has no position in any of the stocks mentioned. Daniel Miller has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Under Armour (A and C shares)). The Motley Fool has a disclosure policy.