Few investors have run circles around the broader market quite like Warren Buffett, CEO of Berkshire Hathaway (BRK.A -0.22%) (BRK.B -0.44%). Even though Buffett hasn't exactly outperformed the broad-based S&P 500 over the past decade, his performance over the past 55 years speaks volumes. Whereas the S&P 500 has risen by a cool 19,784% since 1965, inclusive of dividends, Berkshire Hathaway's per-share market value has soared an almost unfathomable 2,744,062%.
Having averaged an annualized gain of 20.3% over the past 55 years, Buffett has earned a ton of respect on Wall Street. This is to say that when the Oracle of Omaha buys or sells something, Wall Street and investors watch with a keen eye.
Berkshire Hathaway has a 46-security portfolio that, as of this past weekend, was worth about $211 billion. Many of these 46 securities are sound businesses that, over the long run, should generate wealth for shareholders.
But among these 46 holdings, three stand out as being particularly attractive investments at the moment, while two of Buffett's holdings are best avoided in their entirety.
Buy it: U.S. Bancorp
Easily one of the most attractive companies in Buffett's portfolio, and one he's been eagerly adding to recently, is U.S. Bancorp (USB -1.14%).
As of this past weekend, U.S. Bancorp was valued at 24% above its book value. For context, it hasn't ended a year at less than 66% above its book value in over a decade. The reason it commands such a premium relative to other big banks is the fact that it consistently generates the highest return on assets (ROA).
Whereas most big banks were lured into risky derivatives prior to the financial crisis, U.S. Bancorp avoided this temptation. This left it uniquely positioned following the financial fallout to rebound much faster than its peers. When coupled with its efforts to steer consumers toward its digital and mobile apps, as well as control its operating expenses by closing some of its physical branches as consumers migrate to online banking, U.S. Bancorp has been able to maintain its ROA lead over other big banks.
In other words, anytime U.S. Bancorp nears its book value, it becomes an attractive stock to buy.
Buy it: Teva Pharmaceutical Industries
Though it's not a stock that all investors will have the stomach to own, brand-name and generic-drug developer Teva Pharmaceutical Industries (TEVA) has all the makings of an undervalued company that can make investors some serious money.
Teva has been pressured in recent years by legal settlements, a burdensome debt load tied to its Actavis deal, the loss of exclusivity for its top-selling brand-name drug Copaxone, and more recently by its ties to the opioid crisis. Yet the company has made incredible progress since turnaround specialist Kare Schultz took over as CEO in the second half of 2017. Since then, Teva has reduced its annual operating expenses by about $3 billion, all while lowering its net debt by close to $10 billion. Work remains to be done, but Teva is no longer in the financial doghouse it once found itself in.
On a longer-term basis, Teva stands to benefit from an aging global population that's gaining increased access to prescription medicines, as well as rising brand-name drug costs that'll only fuel demand for cheaper generics. In other words, Teva's pricing power should steadily improve over time. That's great news for a company currently valued at only 4 times next year's projected earnings.
Buy it: Amazon
You might think e-commerce giant Amazon.com (AMZN -0.26%) is pricey at $2,500 a share, but that couldn't be further from the truth. In reality, Amazon might end the year at a cheaper valuation than at any point over the past decade.
One of my favorite metrics when analyzing the FAANG stocks is operating cash flow. While the price-to-earnings ratio works great for mature businesses, it doesn't do a very good job of encapsulating value for faster-growing businesses like Amazon that tend to reinvest a significant portion of their cash flow. That's where operating cash flow comes into play. According to Wall Street, Amazon has consistently been valued at 23 to 37 times its operating cash flow over the past decade. Yet, between 2019 and 2023, Wall Street is looking for Amazon to nearly triple its cash flow, potentially pushing its price-to-operating-cash-flow multiple below 13.
Though Amazon's roughly 40% e-commerce market share and its more than 150 million worldwide Prime members are key selling points of this stock, the real growth driver is its cloud services segment. Amazon Web Services is growing at twice the rate of the company's traditional operations and should supply the vast majority of margin growth and operating income for the foreseeable future.
Avoid it: Occidental Petroleum
One thing to know about picking stocks is that no one is perfect, even the great Warren Buffett.
Last year, Buffett handed over $10 billion to Occidental Petroleum (OXY) to aid in its acquisition of Anadarko. In return, Buffett nabbed preferred stock in Occidental with a hefty 8% yield, as well as warrants that would allow Berkshire to purchase additional shares of Occidental in the future. Unfortunately, no one could have foreseen the coronavirus pandemic, and it's wreaked havoc on the oil industry.
The biggest issue for Occidental is the company's debt load, which stood at close to $42 billion at the end of the most recent quarter. The expectation had been that Occidental Petroleum would sell a number of noncore assets to immediately bring down its debt to more manageable levels. But with oil demand (and per-barrel prices) falling off a cliff, some of these deals haven't come to fruition. My Foolish colleague Matt DiLallo noted last month that Occidental has $6.4 billion in debt maturing in 2021 and $4.7 billion maturing in 2022. Without some serious debt financing or capital raises, this company's future remains very much up in the air.
Avoid it: Kraft Heinz
In all likelihood, if Buffett could have sold out of Kraft Heinz (KHC) years ago, he probably would have. But with Berkshire Hathaway holding 325.6 million shares in Kraft Heinz, equating to 26.7% of all outstanding shares, selling its stake would be practically impossible to do without further crushing its share price.
Kraft Heinz's packaged foods actually received a healthy sales boost in the first quarter as a result of COVID-19. With consumers forced to stay home for weeks or months at a time, grocery store purchases of dry goods and snacks ticked up in a big way in recent months.
But a few months does not a trend make. Kraft Heinz ended its latest quarter with $35 billion in goodwill, $31.5 billion in long-term debt, and only $5.4 billion in cash and cash equivalents. It still needs to divest assets to bring its leverage down, and has very little capital that can be devoted to helping bolster its packaged food brands. While a rebound is possible, Kraft Heinz's balance sheet suggests investors keep their distance.