Warren Buffett has made a fortune for Berkshire Hathaway shareholders by investing in financially stable companies with significant competitive advantages, in part by buying shares at times when they are trading at a discount to their intrinsic values. Retail investors stand to benefit significantly by following in Buffett's footsteps, especially during the current market sell-off. The weak investor sentiment has unduly affected many high-quality stocks, and many of Warren Buffett's picks have also not escaped the rampage. Some Buffett stocks, however, make a stronger fundamental case for retail investors than others.
Against this backdrop, here's why telecom giant Verizon Communications (VZ -0.53%) and home furnishings player RH Holdings (RH 1.32%) are suitable buys for retail investors in the current market dip.
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1. Verizon Communications
Verizon is currently trading at a price-to-earnings ratio (P/E) of just about 10, significantly lower than the telecommunication services industry's median multiple of 18. The company seems severely undervalued when we consider that it pays a very healthy dividend yield of 4.81%. Additionally, the company's current payout ratio (percentage of earnings paid as dividends) is only 47.65%, implying that the dividends are safe and sustainable for the coming years.
Verizon is a solid play on the rapid adoption of 5G in the U.S. On Jan. 19, the company rolled out the C-band 5G network (radio airwaves operating in mid-band spectrum frequency) -- expected to result in more data consumption at higher speeds. This is a step up from the company's 5G nationwide network (low band spectrum frequency) which provides good coverage but results in lower speeds.
Verizon's 5G ultra wideband network delivered on high band spectrum frequency (mmWave), which now also incorporates C-band 5G network, is reaching out to an additional 100 million people in more than 1,700 cities in the U.S. The company has been offering attractive subscription plans and promotions to boost its 5G membership across consumer and commercial segments.
Besides wireless mobility, Verizon is also rapidly increasing the coverage of its broadband network. At the end of fiscal 2021 (ending Dec. 31, 2021), the company's fixed wireless solutions had covered over 20 million households in the U.S.
Thanks to these tailwinds, Verizon's fiscal 2021 revenues were up 4.1% year over year to $133.6 billion, while adjusted earnings per share jumped by 23.7% year over year to $5.32.
The global 5G smartphone market volume is expected to grow from 18.7 billion units in 2019 to 14,942.6 billion units by 2027. With only one-third of the company's customers on 5G-enabled handsets at the end of fiscal 2021, there remains significant scope for Verizon to benefit from the device upgrade cycle in coming months. For all of these reasons, the high-yielding telecom giant could be a compelling buy for some investors, especially while trading at its current discount.
2. RH Holdings
Shares of leading North American luxury furniture player RH (commonly known as Restoration Hardware) are currently down by over 45% from their 52-week high of $744.56 set on Aug. 12. Despite the recent market sell-off, this pullback seems overdone considering that the company boasts some of the highest profit margins in the furniture business.
In the third quarter (ending Oct. 31, 2021), revenues were up 19% year over year and crossed the $1.0 billion milestone, while GAAP net income soared by 297% year over year to $184 million. The company carried $2.2 billion in cash on its balance sheet at the end of the third quarter. Much of these funds can be attributed to the $2 billion debt financing completed in October 2021. However, this debt does not mature till October 2028 and carries a minimum interest rate of only 3%.
RH's financial numbers look quite impressive considering that the company faced significant supply chain challenges that prevented the launch of the new RH Contemporary line, several store openings, and the launch of a mailing catalog in the third quarter. RH also raised the lower end of its revenue and adjusted operating margin guidance for fiscal 2021.
RH is expected to benefit from the launch of a new line, new store openings, and increased marketing efforts -- deferred from the third quarter to 2022. The company is also gearing up to expand its presence beyond the $170 billion home furnishings market, in other areas such as the $200 billion hotel market and $1.7 trillion housing market in North America. Finally, the company has also been working to expand its presence in several European markets.
The new RH ecosystem is expected to target an overall market of $7 trillion to $10 trillion. The company sees this as a huge opportunity, since even a 1% share of this global market will translate into a $70 billion to $100 billion revenue opportunity. Considering the company's solid brand power, loyal and relatively wealthy client base, and huge addressable market, this Buffett stock could prove to be an attractive long-term buy for retail investors.
