Berkshire Hathaway CEO Warren Buffett is known for investing in value stocks -- companies that trade at relatively low multiples compared to their earnings and growth potential. Kraft Heinz (KHC 1.39%) and Verizon (VZ 0.75%) are among those in his conglomerate's holdings, and both could boost your portfolio from here.
The case for Kraft Heinz
Trading at a forward price-to-earnings ratio (P/E) of just 14, Kraft Heinz is a quintessential Buffett value stock. Its operations are also relatively stable because of its focus on consumer staples like food and condiments. Though it's a slow-growth business, Kraft Heinz is a solid investment because of its massive scale and industry-leading brands.
Warren Buffett. Image source: The Motley Fool.
Kraft Heinz was formed in 2015 through a merger between Kraft Foods and Heinz, which gave it a broad catalog of well-known, segment-leading brands like Heinz Ketchup, Kraft cheese, and Jell-O. Buffett got involved with Heinz in 2013 and helped orchestrate the merger with Kraft.
Unfortunately for Buffett, the company has faced headwinds from irregular accounting and competition from newer healthier brands -- which led to a staggering $15.4 billion write-down on the value of some of its assets in 2019. Buffett admitted in an annual shareholder meeting that he had made a mistake with the Kraft portion of Kraft Heinz.
Nevertheless, Berkshire still owns the stock. Moreover, with the stock price down by around 63% from its 2017 all time high of $97 per share, much of the downside looks priced in -- especially considering the company's many advantages.
Brand dominance gives Kraft Heinz an economic moat -- the ability to maintain a competitive advantage over rivals. Potential upstarts are unlikely to have the resources to unseat Heinz from the No. 1 spot in the ketchup segment, for example. As such, the company's revenue streams look relatively safe.
And according to CEO Miguel Patricio, Kraft Heinz expects to come out of the pandemic "much stronger" than it entered by leveraging its massive scale to tackle challenges like inflation. With the Federal Reserve expecting annual inflation to hit 4.2% by the year's end, Kraft Heinz's economies of scale advantage could help it produce items more cheaply than rivals.
Second-quarter sales fell 0.5% year over year to $6.62 billion, beating expectations by roughly $70 million. The company also boasts a dividend yield of 4.4%.
The case for Verizon
If you thought Kraft Heinz was cheap, Verizon's valuation will blow your mind. Trading for just 10 times forward earnings, the telecommunications giant is a rare bargain. The company is poised to benefit from its significant moat in the telecommunications industry, and with a dividend payout ratio of 52% should have no trouble sustaining its large distributions to shareholders.
Berkshire Hathaway purchased $8.6 billion worth of Verizon stock in the fourth quarter of 2020. He probably likes the company because its sheer scale (Verizon's 4G LTE reaches 98% of the U.S. population) keeps it competitive in a market with just two other significant players, ensuring relatively reliable revenue -- so long as people continue using cellphones and other network-reliant devices.
In the second quarter, Verizon's revenue increased by 11% to $33.8 billion, due in part to an easier-than-usual comparison to 2020. According to CEO Hans Vestberg, Verizon's network and in-store traffic are almost back to pre-pandemic volumes. And the rollout of 5G-enabled devices will also be an exciting tailwind for Verizon as it continues to deploy its 5G network. The higher bandwidth and capacity technology could allow Verizon to charge more for plans and expand the use cases for Internet of Things applications.
Verizon's dividend makes it a great pick for income investors. At current share prices, it yields 4.7%, and has increased its payout for eight consecutive years.
Betting on value
With the S&P 500 trading at an average P/E ratio of 35, Kraft Heinz and Verizon's valuations of 14 and 10 times forward EPS make them rare bargains in a pricey market. Both companies are mature and relatively slow-growing, but their healthy dividends and defensive business models could add stability and income to your portfolio.
