Warren Buffett has built his reputation over the years by succeeding with investments in a variety of industries. However, the specter of the coronavirus pandemic has cast a somewhat dark cloud over Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) stock portfolio. Their status as Warren Buffett stocks did not necessarily make these companies immune to the COVID-19 stock sell-off.
Still, declines do not necessarily negate the Buffett philosophy. Warren Buffett famously stated, "Be fearful when others are greedy, and greedy when others are fearful." Thus, today's environment could suit those who want to buy under this philosophy well. While numerous Buffett stocks could produce higher returns, investors should pay particular attention to these three: American Express (NYSE:AXP), Restaurant Brands International (NYSE:QSR), and Southwest Airlines (NYSE:LUV).
1. American Express
The fintech industry generally has benefited as society grows increasingly cashless. However, one war on cash stock that appears underappreciated is American Express. Buffett bought this early pick in his portfolio in the early 1960s after a bad loan led to doubts about the company's long-term survival. The company recovered, and it has delivered enormous gains for Buffett over the last few decades.
American Express differs from other payment processors such as Visa and Mastercard in that it also acts as a lender. Much like in the early 1960s, it may again have to deal with bad loans as COVID-19 shutters businesses across the country.
This challenge may partially explain why its stock has fallen by nearly 45% from its 52-week high as of the time of this writing. This has taken its forward P/E ratio to around 9.0.
However, even after revised estimates, analysts expect revenues to rise from 2019 levels. Moreover, even with expectations of falling profits, earnings should exceed 2019 levels by 2021. Profits are also expected to grow by an average of 9.5% per year over the next five years.
Furthermore, the coronavirus-induced slowdown will likely not reverse the trend toward a cashless society that benefited American Express stock in previous years. For these reasons, investors should not allow a temporary hiccup to turn them away from American Express stock.
2. Restaurant Brands International
Restaurant Brands International, like most restaurant companies, has found its dine-in business decimated by efforts to stop the coronavirus. However, one can also argue that its restaurants are best prepared for this slowdown. As the owner of Tim Horton's, Burger King, and Popeyes, it has long-established take out and drive-thru options. For this reason, these businesses are well-equipped to continue to serve customers, even under COVID-19-related restrictions.
Despite this somewhat brighter outlook compared with other restaurant peers, Restaurant Brands stock has fallen by about 45% from its February high. This means that since investing in the Canada-based restaurant giant in 2014, Buffett has seen most of his non-dividend returns wiped out. It now trades only modestly above the $35.05 opening price where the stock debuted in December 2014.
However, this has created an opportunity for new investors. Buying at current prices not only brings investors a dividend yield of about 5.7%, but it also allows them to benefit from the company's substantial profit growth.
Moreover, this has placed its forward P/E ratio at around 8.8. This appears cheap considering that analysts expect earnings to rise by an average of 19.1% per year for the next five years.
Furthermore, thanks to the recent swoon, it trades at a massive discount from the 34.6 average current P/E ratio the company has maintained over the last five years. Once coronavirus passes and society returns to normal, it could help Restaurant Brands stock move closer to its average P/E.
3. Southwest Airlines
Warren Buffett first acquired Southwest Airlines stock in 2016. As of the time of this writing, it is Berkshire's largest airline holding measured by market value, worth slightly more than its Delta position for now. Southwest Airlines stock traded higher than 2016 levels for most of the time Buffett has owned the airline.
However, while solid, Southwest stock is not immune to turbulence. All of Buffett's gains disappeared as Southwest stock recently lost around 45% of its value from its February high.
Still, this presents a unique opportunity for new investors. The recent drop takes the forward P/E ratio down to 10.9. This trades at a discount since the average current P/E ratio for the last five years has come in at about 13.1.
In the end, investors buy Southwest for stability. The fact that its cash position exceeds its long-term debt testifies to this financial strength. For this reason, investors may tolerate some degree of lackluster results. For one, profit growth forecasted to average only 3.3% per year over the next five years. The current dividend yield of just over 2.2% is also slightly below S&P 500 averages. Moreover, Southwest appears poised to see its first quarterly loss since 2009.
Nonetheless, Southwest recently celebrated 47 straight years of annual profits. If current analyst estimates prove correct, that streak will continue despite the airline industry's current troubles. That will help bring buyers back once passengers return to flying.