Please ensure Javascript is enabled for purposes of website accessibility

Warren Buffett Just Bought These 2 Dirt-Cheap Stocks. Should You?

By Keith Speights - Feb 23, 2021 at 6:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Yes -- if you're looking for the same qualities in a stock that the billionaire investor is.

We now know which stocks Warren Buffett liked and disliked in the fourth quarter of 2020. Berkshire Hathaway (BRK.A -0.15%) (BRK.B -0.17%) submitted its 13F-HR regulatory filing to the U.S. Securities and Exchange Commission (SEC) last week. 

In total, Berkshire bought 10 stocks in Q4. Its activity featured new positions in four stocks and adding to positions in six stocks, including AbbVie (ABBV 1.91%) and Bristol Myers Squibb (BMY 0.14%). Buffett just bought these two dirt-cheap stocks. Should you?

Smiling Warren Buffett with people in the background

Image source: The Motley Fool.

Buffett's dirt cheap buys

Berkshire first scooped up shares of AbbVie and Bristol Myers Squibb in the third quarter. They weren't the only big pharma stocks bought in Q3; the giant conglomerate also purchased shares of Merck and Pfizer. In the fourth quarter, Berkshire sold off its stake in Pfizer. However, it added to its positions in AbbVie, BMS, and Merck.

We don't know for sure if Buffett personally made the decisions on each of these transactions. However, he undoubtedly approved the buys and sells, even if one of Berkshire's investment managers actually made the calls. AbbVie and BMS are great fits with Buffett's roots in targeting value stocks.

AbbVie currently trades at less than 8.6 times expected earnings. BMS trades at slightly above eight times expected earnings. By comparison, Merck's forward earnings multiple is 11.3. Berkshire stock itself looks downright expensive, relatively speaking, with shares trading at 22.5 times expected earnings. 

Attractive beyond their valuations

Buffett likely viewed AbbVie's and Bristol Myers Squibb's valuations as too cheap to pass up. However, there are other things that are attractive about both stocks.

AbbVie boasts one of the juiciest dividends in all of healthcare. Its dividend currently yields 4.95%. The company is also a Dividend Aristocrat, with 49 consecutive years of dividend increases. BMS doesn't have as impressive of a track record as AbbVie does, but I suspect Buffett liked the drugmaker's dividend yield of over 3.2%.

BMS' growth prospects are even more appealing, though. Analysts project average annual earnings growth of more than 21% over the next five years. Current blockbusters, such as blood thinner Eliquis and cancer immunotherapies Opdivo and Yervoy, will likely fuel most of this growth. In addition to its promising pipeline, BMS has rising stars with anemia drug Reblozyl and multiple sclerosis drug Zeposia.

AbbVie's growth story will consist of three phases. The company should deliver strong growth over the next couple of years. However, in 2023, sales of AbbVie's top-selling drug, Humira, will begin to fall as it faces biosimilar competition in the U.S. The third growth phase, though, should begin in 2025 and beyond as AbbVie returns to strong growth and the company's other products more than offset Humira's declining sales. 

Follow the leader?

You shouldn't buy any stock just because someone else did, even if that person is legendary investor Warren Buffett. For that matter, you shouldn't sell a stock just because Buffett or another respected investor did.

However, it's smart to understand why Buffett likes or dislikes a stock. In the case of AbbVie and Bristol Myers Squibb, he almost certainly appreciates their low valuations and strong dividends. He also likely thinks the long-term growth prospects are solid for both companies. 

AbbVie and BMS likely won't appeal to investors seeking aggressive growth. But if you're looking for an attractive valuation, a strong dividend, and solid long-term growth prospects, these two stocks look like good picks right now. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
BMY
$77.24 (0.14%) $0.11
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$462,890.00 (-0.15%) $-716.49
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$308.64 (-0.17%) $0.53
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$151.96 (1.91%) $2.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.