If the stock market crash of 2020 has you racking up large paper losses of late, realize that you're not alone. Whether you're a novice investor or one of the greatest investors of our generation, you've probably seen the nominal value of your investment portfolio decline as the coronavirus disease 2019 (COVID-19) has spread globally and made the United States its new epicenter.
Take Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) as a perfect example. As of the previous Monday, March 23, Berkshire Hathaway's portfolio had lost nearly $100 billion in value from Feb. 19, with everything from airlines to financials enduring quite the beat-down.
Yet, this isn't Buffett's first rodeo with a bear market. He's seen plenty of stock market dips over his multi-decade investing career, and he's used these moments of fear to load up on high-quality businesses that possess competitive advantages, strong leadership, and often recognizable branding. Making investments during these opportune times has been the key that's allowed the Oracle of Omaha to handily outperform the broader market.
How "handily," you ask? In Berkshire Hathaway's 2019 shareholder letter, it shows that the broad-based S&P 500 returned 19,784%, inclusive of dividends, since 1964. Comparatively, the per-share market value of Berkshire Hathaway increased by 2,744,062% over this same period. That's how much better Buffett has been at identifying value during periods of fear and instability.
Right now, Berkshire Hathaway's portfolio contains 52 securities (50 stocks and two exchange-traded funds/trusts), nearly all of which have declined over the past five weeks and have, in theory, become much more attractive on a valuation basis. However, three Buffett stocks stand out as being ridiculously cheap, and probably worth buying right now.
One of the hardest hit industries during the COVID-19 crash are credit-service providers, such as American Express (NYSE:AXP). A longtime Buffett holding, AmEx wound up losing half of its value between Feb. 19 (the market's peak) and March 18.
The worry here is that AmEx could face something of a double whammy since it's a provider of payment processing services as well as a lending company. If consumer purchasing activity slows due to COVID-19 mitigation measures, AmEx will see a reduction in processing revenue. Further, these mitigation measures could make it difficult for borrowers to pay their bills, potentially increasing credit delinquencies and company charge-offs.
While these are very realistic concerns, they overlook the fact that American Express's primary audience is affluent individuals. People with higher incomes are far less likely to be seriously impacted by the coronavirus outbreak than low- and middle-income workers. This should, in all likelihood, keep AmEx's delinquency rate from rocketing higher. And, assuming this illness is a short-term concern, a quick pick-up in spending should lift processing revenue in the second half of the year.
Even with Wall Street reducing AmEx's full-year estimates for 2021, investors now have a chance to buy into the successful payment processor and lender for under 10 times forward earnings. It's been more than a decade since American Express was valued at a single-digit forward price-to-earnings ratio, which is the perfect signal for investors to pounce.
Teva Pharmaceutical Industries
Branded and generic-drug developer Teva Pharmaceutical Industries (NYSE:TEVA) was actually an investment made by one of Buffett's trusted team members in 2018. So while it is a Buffett stock, it's not been handpicked by the Oracle himself.
Teva has been raked over the coals for the past three-plus years, with the company settling bribery allegations, losing exclusivity on its top-selling branded therapy (Copaxone), experiencing top-level executive turnover, and more recently dealing with lawsuits from 44 states concerning its role in producing opioids. It was already down big well before the coronavirus crash occurred, but has been pushed back near levels not seen in 20 years.
Yet, there is good news. According to turnaround specialist CEO Kare Schutlz, 2019 was Teva's trough year. Since taking the helm, Schultz has helped slash operating expenses by $3 billion a year, and has successfully reduced the company's net debt by $8 billion. Further, growing demand for generics in the wake of the coronavirus pandemic should help alleviate the modest pricing concerns Teva has experienced, all while guaranteeing $2 billion or more in annual operating cash flow.
Right now, investors can buy into Teva for a mere three times Wall Street's consensus earnings per share for 2021, as well as roughly four times operating cash flow. That's an extremely cheap valuation for a company that's reduced its debt load and made significant strides with U.S. states to put its opioid litigation in the rearview mirror.
Bank of America
Maybe the biggest shock of all is just how cheap Buffett's second-largest holding by market value has become, Bank of America (NYSE:BAC). This money-center giant has lot close to 40% of its value on a year-to-date basis.
Similar to AmEx, BofA has two factors working against it. First, banking is a cyclical industry that does its best when the U.S. economy is thriving. The current lull in economic activity and the growing likelihood of a sharp (but hopefully short) recession does not bode well for banks.
The other issue being that the Federal Reserve lowered its federal funds target rate back to an all-time low. Since Bank of America is one of the most interest-sensitive banks, it'll mean less in the way of net interest income for the foreseeable future.
What's important to note with BofA is that it's worked hard to improve the credit quality of its outstanding loans since the financial crisis, and has been especially successful in reducing noninterest expenses. By closing some of its physical branches over the past decade and promoting digital and mobile banking, BofA has successfully lowered its cost to provide consumer banking services. Not to mention, BofA's aggressive capital return program in recent years has really helped to create value for its shareholders.
Today, investors can purchase Bank of America for a little over seven times Wall Street's projected earnings share for 2021, as well as just 79% of its book value. This marks a five-year low in terms of price-to-book value, and the lowest forward P/E for Bank of America since 2011. Now is the time for opportunistic investors to buy.