Following news of Russia invading Ukraine, the S&P 500 index slipped to being down more than 10% from its peak -- marking an official entry into correction territory. The benchmark index's level has recently regained a bit of ground, but it's still down roughly 9% from last year's peak and 8% across 2022's trading.
With turbulence roiling the market, three Motley Fool contributors have identified three stocks backed by legendary investor Warren Buffett and his company Berkshire Hathaway (BRK.A 0.43%) (BRK.B 0.47%) that are worth buying right now. Read on to see why they think that Amazon (AMZN 2.29%), Bank of America (BAC -0.16%), and UPS (UPS -1.06%) are top companies to invest in amid recent market turmoil.
Image source: The Motley Fool.
This tech giant is built to win the future
Keith Noonan (Amazon): E-commerce and cloud computing leader Amazon stands as a relatively small holding in the Berkshire Hathaway portfolio. The investment conglomerate didn't start building a position in the company until 2019, and Buffett went so far as to describe himself as an "idiot" for not getting in on the stock sooner. Even the man who earned the nickname The Oracle of Omaha has some investing regrets, and it's not hard to see why he was disappointed to miss out on much of the Amazon's incredible rise.
Amazon stands as one of the most successful companies of all time, and there's a good chance it will go on to deliver more big wins. With the stock having pulled back amid recent turbulence for the broader market, long-term investors have another worthwhile opportunity to build positions in this world-shaping company.
The stock trades down roughly 9% across 2021's trading, and it's down roughly 19% from the high that it hit last year. Lapping incredible, pandemic-driven performance, Amazon is admittedly facing some tough growth comparisons. Massive technology and infrastructure investments are also putting some pressure on earnings in the near term, but the business remains excellently positioned to win the future, and it will almost certainly be one of the most influential companies of the next decade.
In addition to its industry-leading online retail and cloud services businesses, Amazon has also been benefiting from its fast-growing digital-advertising unit. With its data analysis expertise and incredibly valuable e-commerce marketplace, the company has the foundations to build an even more phenomenally successful ads business, and that kind of cross-segment synergy will likely continue to be a benefit in a wide variety of other emerging product and service categories.
Unexpected profit growth ahead
James Brumley (Bank of America): I've long been a fan of Berkshire's second-biggest publicly traded holding, Bank of America. But I'm even more of a fan now than I usually am.
Yes, the stock's recent pullback linked to Russia's invasion of Ukraine is probably only going to be a short-term setback. That's not my motivation for mentioning it now, though... nor is it Berkshire's reason for holding a $44 billion stake in the megabank. I suspect Buffett and his acolytes like the same thing I like here, which is the stock's dividend.
Investors keeping close tabs on the stock will likely know its current dividend yield is just under 2% following this past week's tumble, which is healthy but hardly impressive. Take a step back and look at the bigger picture, though. The Federal Reserve anticipates that around eight quarter-point interest rates hikes will be imposed between now and the end of 2024. It matters to banks because the higher interest rates move, the more profitable lending becomes. Obviously it's possible the Fed could move too far, too fast, crimping demand for loans and even stifling the economy. Assuming the Fed's governors pace their rate hikes responsibly, though, I can see B of A's net interest income growing more than most people presently anticipate.
At the very least, stepping in now means you're stepping into a low-cost, high-quality blue chip name at a point in time when quality and value are apt to be rewarded.
UPS is at the top of its game
Daniel Foelber (UPS): With Berkshire Hathaway owning just under 60,000 shares, United Parcel Service makes up less than 0.1% of its portfolio. But UPS has the makings of a textbook Buffett stock. He cares about strong fundamentals -- so let's highlight some of the standout reasons why UPS is a good buy now.
UPS expects to generate a 13.7% operating margin in 2022 off revenue of $102 billion. The guidance represents a decrease in revenue growth but even higher profitability. UPS generated a return on invested capital (ROIC) of 30.8% in 2021. It expects ROIC to be above 30% in 2022.
Like operating margin, ROIC is a good metric for determining a business's efficiency. While operating margin shows how good a business is at converting sales into profit, ROIC shows how good a business is at deploying capital toward profitable ventures. Before Carol Tomé took over as CEO in March 2020, UPS was a bulky business with overexpanded routes, low growth, a mediocre operating margin, and a weak ROIC. Since then, UPS has streamlined its capital expenditures (capex) to focus on profitable ventures. Despite earning record revenue, earnings, and free cash flow in 2021, UPS spent just $4.2 billion on capex and is guiding for $5.5 billion in 2022 capex -- which is below what it spent in 2019.
This is all to say that UPS is using earnings to deliberately grow its business. It's also passing along profits to shareholders through its dividend and share buybacks. UPS just raised its dividend by 49% to $6.08 per share per year, representing an annual yield of 2.9%. It expects to buy back at least $1 billion of its own stock in 2022 and distribute $5.2 billion to shareholders in dividends.
What's more, UPS has a price-to-earnings ratio of just 13.9 -- making it absurdly cheap given its rock-solid fundamentals.
Excellent management, a high dividend yield, a massive moat that protects from competition, a good value, and a growing business are all traits that Buffett looks for. And UPS has them all in spades.
