If you're looking for new investment ideas, you could do a lot worse than scour the holdings of Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). A $1,000 investment in Berkshire Hathaway in 1965 -- the year Buffett took over the reins of the once struggling textile mill -- would have been worth $24.73 million at the end of 2018. Buffett grew the value of the company by either acquiring businesses outright or buying shares of great stocks -- all done with a keen eye on value and letting time do its magic.
Buffett likes the high-flying retailer
Warren Buffett and Berkshire Hathaway's vice chairman, Charlie Munger, have spoken highly of Amazon CEO Jeff Bezos in the last few years. Buffett has said that he missed the boat on Amazon, but according to Munger, it's not too late. Earlier this year, Munger told CNBC that Amazon "is an utter phenomenon of nature" and that the company still has a long growth runway.
Indeed, Amazon continues to report robust growth rates even though it's one of the largest companies in the world. The online retail giant increased revenue by 17% year over year in the first quarter. That is a deceleration from previous quarters but still an impressive growth rate for a company that generated $241 billion in sales over the last year.
Berkshire Hathaway owned 483,300 shares of Amazon as of March 31, 2019, which would be worth $834 million at current prices. However, it wasn't Buffett, but one of the two investment managers who oversee a small portion of Berkshire's equity portfolio who made the decision to buy Amazon stock. Buffett approves, stating that the decision was made with the same approach to value that the Oracle of Omaha has practiced throughout his career.
So how is Amazon a value trading at a trailing P/E of 72? For one, Amazon typically generates a lot more cash from operations than its reported earnings. Over the last year, the company generated $23 billion in free cash flow (FCF) compared with only $12 billion in net income. So the stock trades at a price-to-FCF ratio of 37 -- not as expensive as its P/E would lead you to believe.
Second, Amazon Web Services is growing very fast, with sales soaring 41% year over year last quarter. More importantly, AWS made up 50% of the company's operating income during the first quarter. Amazon also has a fast-growing advertising business included in its "other" sales category, in which sales grew 34% year over year in the first quarter.
At least two analysts in the last year have pointed out that investors are undervaluing Amazon's core retail business after stripping out the value of AWS and advertising. It's likely the value gurus at Berkshire Hathaway see the same value in Amazon and stepped up to the plate.
One of Buffett's favorite bank stocks is on sale
It's no secret that Buffett is a big fan of bank stocks. Berkshire owns several, including Wells Fargo, U.S. Bancorp, and M&T Bank, to name a few, with JPMorgan being the second largest bank holding for Berkshire. In the latest quarter, Berkshire Hathaway increased its stake in the stock, and now owns 59,514,932 shares of JPMorgan, worth about $6.5 billion at current prices.
Warren Buffett is an admirer of JPMorgan CEO Jamie Dimon and clearly thinks the bank's shares are cheap at current prices. JPMorgan has a strong track record of growing profits. Last year, the bank's return on tangible equity was 17% -- tops among large U.S. banks.
Dimon believes the company can continue to earn above 15% on its tangible equity if it keeps investing profitably in areas to drive growth. One opportunity is opening 400 new branches over the next few years.
The most important advantage for JPMorgan -- other than having a mind like Dimon's at the helm -- is its sheer size. The company is the largest bank in the U.S. with $2.74 trillion in assets on the balance sheet. Likewise, it has leading market-share positions in consumer banking and investment banking.
Sometimes size can get banks into trouble, as we saw during the Great Recession in 2008. But even during that tumultuous year, JPMorgan still managed to earn a profit of $5.6 billion, which says a lot about the bank's culture for risk management -- Buffett certainly took notice of that achievement.
Since 2004, the bank's tangible book value increased from $15.35 per share to $56.33 in 2018. The stock price has paralleled that increase, climbing 309% including dividends, with most of that gain coming in the last few years.
The stock currently trades for 10.9 times this year's earnings estimates and about two times tangible book value. However, Buffett thinks the stock should trade for three times tangible equity. If he is right, that means JPMorgan could be worth 50% more than the stock's current price of $110.16 per share.