Berkshire Hathaway CEO and world-renowned superinvestor Warren Buffett is a dyed-in-the-wool value investor. Buffett's core strategy centers around buying shares of companies with remarkably strong underlying businesses (deep competitive moats, global brand recognition, reliable and growing free cash flows, etc.), yet whose shares trade at a discount relative to their intrinsic value.
And this value-oriented approach has certainly served Buffett well during his tenure as Berkshire CEO. Since taking the reins of the diversified holding company 56-plus years ago, Berkshire's stock has delivered total returns on capital in excess of 6,450%. In fact, $10,000 invested in Berkshire stock at the time Buffett become CEO would be worth approximately $654,890 today.
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Berkshire's various holdings aren't all top value stocks, however. The reality of the situation is that Berkshire, along with most other mega-funds, often gets special incentives, such as an elevated dividend yield, to buy shares of a company in bulk.
As a result, the value proposition offered to large holding firms like Berkshire is often drastically different than the one available to ordinary retail investors via a company's common stock. Retail investors, in turn, shouldn't necessarily buy shares of a Buffett stock simply because it looks cheap based on a classic valuation metric such as price to earnings, price to book, or price to sales.
Armed with this insight, let's break down whether Berkshire's three cheapest holdings, based on their forward-looking price-to-earnings ratios, are bona fide value stocks suitable for retail investors.
A top big pharma stock
At a hair under eight times forward earnings, the pharmaceutical giant Bristol Myers Squibb (BMY -0.27%) is Berkshire's third-cheapest stock holding at the moment. Bristol's shares have essentially treaded water over the past year due to its three top-selling medications (Eliquis, Opdivo, and Revlimid) losing market exclusivity this decade.
While this wave of patent expirations may be worrisome at first glance, the drugmaker does have a solid plan in place to not only offset these future sales declines, but to keep its top line humming along all the way out to 2030. Namely, Bristol has multiple new drug launches planned over the next few years, several of which are for potential blockbuster medications.
The long and short of it is that this isn't Bristol's first bout with the patent cliff. The company has lost market exclusivity for scores of blockbuster medications in the past. Yet it has always managed to hit on new growth products to create enormous value for long-term shareholders. Value-oriented investors, in turn, shouldn't hesitate to capitalize on the market's overreaction to the pharma titan's ongoing portfolio churn.
A potential sleeping giant
Shares of the large-cap automaker General Motors (GM -0.04%) are currently trading at 7.43 times forward earnings. That's good for second place on Berkshire's list of cheapest stock holdings. The auto giant's stock has stagnated over the last year in response to the rise of electric vehicles, the market-wide disinterest in classic value stocks, and the upcoming interest rate hikes by the Federal Reserve that will surely make monthly payments more expensive for most car buyers.
General Motors, though, may have some magic in it that the market has yet to fully appreciate. Last summer, the car giant announced an intriguing plan to invest heavily in electric vehicles, autonomous vehicles, and batteries. With a global commercial footprint and rock solid branding power, General Motors could prove to be a formidable competitor in these high-growth segments of the market.
That said, General Motors' latent value proposition, albeit massive, may take a few years to win over investors. So, while this auto stock does come across as a compelling buy, this Buffett value stock will likely require a multi-year holding period to realize its full potential.
Buffett's cheapest stock holding
With its shares trading at 3.12 times forward earnings, Israeli generic and branded drug giant Teva Pharmaceutical Industries (TEVA) is Berkshire's cheapest stock holding by a wide margin.
The drugmaker's shares have lost three-quarters of their value over the last five years due to a series of unfortunate events. Specifically, Teva took on far too much debt to acquire Actavis' generic drug portfolio back in 2016, it didn't have another franchise-level medication waiting in the wings to replace the multiple sclerosis drug Copaxone following its loss of exclusivity, and it has been embroiled in a string of costly lawsuits.
Teva's long-awaited turnaround, though, does seem to be coming into focus now, thanks to three key developments. First, the company has slowly built a well-rounded product portfolio that should return it to sustainable levels of growth soon. Second, its various legal problems ought to be resolved in the not-so-distant future. Third, Teva's ongoing deleveraging process has significantly improved the health of its balance sheet over the past few years. Teva's stock thus appears poised for a major rebound, perhaps as soon as this year.
