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2 Buffett Stocks That Look Like Great Buys in November

By David Jagielski – Nov 5, 2021 at 7:15AM

Key Points

  • Merck has a COVID-19 pill that, if approved for use, could generate billions for the company next year.
  • Kraft is one of Buffett's largest holdings and the company just reported a solid earnings beat.
  • Both of these stocks trade at relatively low forward price-to-earnings multiples.

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They have solid fundamentals, their shares are cheap, and they also pay dividends.

If you're looking for a top stock to hold in your portfolio, a good starting point can be to look at the stocks held by Warren Buffett's conglomerate, Berkshire Hathaway. It can give you some easy ideas of potential long-term investments that you can tuck away in your portfolio for years.

Two stocks from that list that strike me as particularly strong buys this month are Merck (MRK -1.23%) and Kraft Heinz (KHC). They're stable companies with some recent catalysts that could propel their shares higher in the months ahead.

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Image source: Getty Images.

1. Merck

Healthcare company Merck makes for a solid investment as the business routinely reports strong numbers; in each of the past three years, it has netted a profit margin of at least 14%. And when the company released its quarterly results on Oct. 28, Merck showed strong growth with sales rising by 20% to $13.2 billion for the period ending Sept. 30. Its pharmaceutical business grew at a rate of 18% and animal health sales also increased by 16% year over year. That growth helped the company's net income double to over $4.5 billion.

But what investors are likely most bullish about right now is the company's COVID-19 pill, molnupiravir, which has demonstrated in a phase 3 study that it can cut the risk of hospitalization or death for people with mild or moderate COVID-19 by 50%. The company estimates that if the Food and Drug Administration (FDA) approves the drug next month, it could generate up to $7 billion in revenue through to the end of next year.

Yet, despite all the positive news, Merck's stock trades at a relatively modest forward price-to-earnings (P/E) multiple of less than 16. That's lower than healthcare giant Johnson & Johnson, which investors are paying 17 times future earnings for. Given the potential boon Merck may get if its COVID-19 pill is approved, the stock could soon look like a bargain. Combine that with a safe business and a stock that pays a dividend yield of around 3% (well above the S&P 500 average of 1.4%), and this becomes of the better buys out there right now.

2. Kraft Heinz

Food company Kraft Heinz, known for its many popular brands, including Jell-O and Maxwell House, is routinely one of Berkshire's top holdings. A big part of the reason Kraft makes for a sound investment is the strong brands it has in its portfolio that are staples in households across the globe. And that power enables it to more easily adapt to the pandemic than other companies might be able to.

For instance, Kraft is coming off a solid earnings beat in its most recent quarter -- benefiting from price increases that helped offset inflation. For a company without strong brand recognition, an increase in price could be catastrophic to its top and bottom lines. For Kraft, however, its net sales of $6.32 billion for the period ending Sept. 25 were down just 1.8% year over year and beat analyst expectations of $6.05 billion. Its adjusted per-share profit of $0.65 was also higher than Wall Street's projections of $0.58. The strong performance should serve as a reminder to investors the resiliency that Kraft possesses, even amid such challenging times. It also doesn't hurt that big-box retailer Walmart is its largest customer (it accounts for more than one-fifth of Kraft's revenue). 

And like Merck, Kraft pays an above-average dividend yield of 4.4%. Its quarterly payment of $0.40 is currently well below the $0.65 adjusted earnings per share the company reported this past quarter, which should give investors some confidence that even given the current adversity (e.g., supply shortages, inflationary pressure), the payout can continue. 

It's also a relatively cheap stock as it trades at a forward P/E of 13. By comparison, consumer goods company Kellogg trades at more than 15 times its future profits. Kraft is a stable buy that can be an excellent option for investors who are focused on both value and dividends.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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