You might think that any stock handpicked by Warren Buffett and his top investment managers would be held in high regard by most investors. However, that's not necessarily the case.
Several stocks in Berkshire Hathaway's (BRK.A +0.76%) (BRK.B +0.93%) portfolio are either beaten down, have bargain valuations, or both. But the Oracle of Omaha sees something in them that many investors seem to be missing. Here are three underrated Buffett stocks that are smart buys right now.
Image source: The Motley Fool.
AbbVie
The average pharmaceutical stock in the S&P 500 trades at more than 14 times expected earnings. And that's well below the 21.4 forward price-to-earnings ratio for overall index. That context is important to understand just how cheap AbbVie (ABBV +1.98%) is with its shares trading below 9.5 times expected earnings.
AbbVie was one of several big pharma stocks that Buffett scooped up for Berkshire last year. An attractive valuation wasn't its only draw, though. The drugmaker also offers a juicy dividend yield (which currently stands at 4.4%). AbbVie is only one dividend hike away from joining the club of Dividend Kings -- S&P 500 members with at least 50 consecutive years of dividend increases.
So why is AbbVie underrated by investors? It's mainly because the company faces biosimilar competition for Humira in the U.S. beginning in 2023. Humira ranks as AbbVie's top-selling drug and generated 43% of its total revenue last year.
However, the company has two newer immunology drugs, Rinvoq and Skyrizi, that it thinks will largely pick up the slack from Humira. AbbVie expects a brief overall revenue decline in 2023 followed by a quick return to growth the following year. With its strong dividend, this Buffett stock could easily generate market-beating returns over the next decade.
StoneCo
StoneCo (STNE +3.64%) lost 20% of its market cap during the first half of 2021. The Brazilian fintech stock is now down more than 30% year to date.
Unlike AbbVie, StoneCo isn't cheap by any stretch of the imagination. Actually, the stock is pretty much priced for perfection. Unfortunately, StoneCo fell short of perfection with its last two quarterly earnings updates, coming in below analysts' estimates.
The COVID-19 pandemic negatively affected StoneCo's business. However, the easing of restrictions in Brazil spurred a rebound beginning in the second quarter. StoneCo CEO Thiago dos Santos Piau thinks that the scale-up of vaccinations in the second half of this year should fuel an even stronger recovery.
StoneCo's long-term opportunity is as strong as ever. The growth prospects for its digital payments business in Brazil are huge. StoneCo's recent investment in and partnership with Brazilian digital bank Banco Inter gives the company even more opportunities.
Verizon Communications
Verizon Communications (VZ 0.20%) has lagged well behind the overall market so far this year, with its shares down close to 5%. The telecom stock is also relatively cheap with a forward earnings multiple of 10.6.
Buffett increased Berkshire's stakes in only four companies during the first quarter of this year. Verizon was one of them, with Berkshire buying 8.3% more shares than it owned at the end of 2020.
The telecom giant's dividend was no doubt appealing to Buffett. Verizon's dividend yield currently stands at nearly 4.5%. But don't overlook the company's growth prospects.
5G wireless networks could present a massive opportunity for Verizon. The company's 5G Home service could be quite attractive to customers looking for a cost-effective wireless connection that in some cases is even faster than cable broadband.
Verizon might not be one of the most exciting Buffett stocks. However, it seems to be an underrated one right now that could be a winner over the long run.
