"The best thing that happens to us is when a great company gets into temporary trouble. ... We want to buy them when they're on the operating table." -- Warren Buffett
The whole American economy is on the operating table right now. The COVID-19 pandemic has hit some industries very hard, but there are some great businesses selling for unbelievable values.
While no one knows when the bear market will end, there are a few quality companies offering incredibly good value right now. Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) hasn't been this cheap in more than 30 years, and if you missed last year's rally in Walt Disney (NYSE:DIS) after it unveiled its new streaming services, now's your chance to get on board.
Here's why these are two great companies to buy stock in before the market rebounds.
1. Berkshire Hathaway doesn't get much cheaper than this
Investors currently have the rare opportunity to buy CEO Warren Buffett's masterpiece around book value -- an opportunity that has only occurred a few times. Berkshire is cheaper today than it was during the financial crisis in 2008-09 based on its price-to-book-value ratio.
In case you're wondering, book value is a measure of a company's financial worth that is calculated by subtracting all the company's liabilities from its total assets. Generally, a stock is considered underpriced if it's trading for less than the value of its assets.
Given the high returns that Buffett has earned on Berkshire's equity over the last 50 years, the market has typically placed a premium on the company's net assets. Berkshire's market value has compounded at a rate of 20% per year since Buffett took control in 1965 through 2019, although returns have slowed in recent years as Berkshire has increased in size.
Buffett has spent years assembling a collection of great businesses that meet his high standards for quality. These businesses, in aggregate, generated $254 billion in revenue in 2019 and nearly $39 billion in cash from operations. Plus, Berkshire has a fortress-like balance sheet, with over $120 billion in cash and short-term investments, which more than offsets its $65 billion in debt.
But the recent sell-off has sent Berkshire's price-to-book value ratio down to its lowest level in the last 30 years, as this chart shows.
However, with a large stock portfolio and dozens of operating businesses exposed to the broad economic shutdown, Berkshire's book value will likely show a decline in the first quarter.
Berkshire owned $248 billion worth of stocks, including large stakes in Coca-Cola and Apple, at the end of 2019. Buffett looks at buying stocks the same way he does at buying whole businesses. That long-term perspective explains why Berkshire has held shares of Coca-Cola since 1988.
Berkshire also owns several subsidiaries with physical store locations, including Dairy Queen and Nebraska Furniture Mart, and many other companies across different industries. The pressure put on these companies, along with the decline in value of Berkshire's stock holdings, means the stock's actual price-to-book value ratio is likely higher than 1.0 right now.
Still, the stock is trading well below what it will sell for in a growing economy. Berkshire's large cash position will help it weather the storm, and Buffett might even find a fat pitch to invest some capital during this downturn.
This is bargain territory for one of the world's best businesses, but you don't have to take my word for it.
In 2011, Berkshire announced it would repurchase its shares at a price no higher than a 10% premium to book value. Buffett has since loosened that threshold, but that was likely because he realized that Berkshire's share price may rarely trade at that bargain-basement level. The greatest investor of all time was essentially telling investors that when the stock falls to where it is trading now, it's a steal.
2. Disney: A fire sale at The Magic Kingdom
Walt Disney owns some timeless entertainment franchises, but the Magic Kingdom is hurting right now as a result of COVID-19. All of Disney's theme parks around the world are currently closed, and Disney Studios has delayed its 2020 film slate until later in the year. The next few months will see Disney lose at least a few billion in revenue. Last year, the parks, experiences, and products segment brought in over $26 billion, with box office sales generating another $11 billion.
Health professionals in the U.S. believe we'll hit the peak of the curve in new cases of COVID-19 this month. There are also treatments and vaccines under development. Disney is already signaling that it expects movie theaters to be reopened this summer.
Disney's Mulan film was scheduled to release in March, but Disney has set a new release date for July 24. Disney World may also reopen this summer, since the Parks website is currently accepting reservations for June 1 or later, although this could change if the coronavirus is not under control by then.
Obviously, a prolonged outbreak would put Disney at risk of not being able to meet its financial obligations. The company had $48 billion of debt and $6.8 billion in cash at the end of December. It just recently issued another $6 billion in debt, which shores up its balance sheet with extra cash in the short term. But if parts of the economy start to reopen in the next few months, placing the economy on a recovery path, Disney stock is a bargain at current levels.
The stock increased about 30% last year after management officially unveiled Disney+ in April 2019. Those gains have been wiped out over the last month. The stock is now selling for 15.5 times trailing-12-month earnings -- the same valuation it sported before Disney+ was announced and before the service attracted nearly 29 million new signups following its launch in November.
The shares look undervalued right now just based on the expected long-term performance of the media networks, parks, consumer products, and studios. Investors are basically getting Disney's ownership of Hulu, Disney+, and ESPN+ thrown in as a bonus, and that could become quite a big bonus over the next 10 years if these streaming services reach more than 100 million subscribers combined over time.
The situation with the coronavirus remains fluid. No one knows what's going to happen, or how long this bear market will last. But if you have some spare cash that you don't need for at least five years, Berkshire Hathaway and Walt Disney are two of the best companies in the world that could be very rewarding investments from current levels.