Factors including high inflation and Russia's invasion of Ukraine have been putting pressure on growth stocks lately. The tech-heavy Nasdaq Composite index is now down roughly 15% in 2022 and 16% from the high it hit last year -- enough to put the pullback well past the 10%-decline threshold that marks the beginning of correction territory.
Despite market pressures, some stocks backed by Warren Buffett and his investment conglomerate Berkshire Hathaway have recently been hitting new highs. Read on for a look at how Chevron (CVX +1.66%), Kroger (KR +1.70%), and Coca-Cola (K +0.00%) have risen above turbulence that has rattled many other companies.
Image source: The Motley Fool.
A balanced way to play the oil boom
Daniel Foelber (Chevron): At first glance, it may seem that Berkshire Hathaway doesn't own many oil and gas or renewable energy stocks. But the energy sector is actually one of Buffett's favorite sectors to invest in. Berkshire Hathaway Energy, which is a subsidiary of Berkshire Hathaway, is a leading U.S. energy operator that makes up the bulk of Buffett's energy investments. However, there are a few oil and gas stocks Buffett has taken a liking to. Berkshire's largest energy stock holding is Chevron. And it's a position that makes perfect sense for Buffett and many like-minded value investors.
One of my favorite Chevron charts shows the relationship between capital expenditures (capex) and free cash flow (FCF).
CVX Capital Expenditures (Annual) data by YCharts
Chevron's spending peaked right before the oil crash of 2014 and 2015. What followed was a period of high, but not as high, spending and negative FCF. Chevron has since drastically lowered its capex while generating gobs and gobs of FCF that more than supports its growing dividend.
Financial discipline is a quality that Buffett often looks for in a company. But so is a sturdy balance sheet and the ability to perform well in good times and bad. For years, Chevron has had a better balance sheet than its peers. What further separates Chevron from other, more speculative oil and gas companies is its diversified business and its efficient portfolio. Chevron can achieve breakeven free cash flow even when oil is around $40 per barrel. It has shifted away from high-risk plays toward shorter-cycle, less capital-intensive plays like the Permian Basin. And what long-term, capital-intensive investments it does make are usually concentrated around natural gas like its liquefied natural gas investments in Australia.
With oil and gas prices at their highest levels in over seven years -- not to mention levels that many skeptics thought would never be reached again, Chevron is absolutely raking in the profits right now. Extra cash should help Chevron further bolster its balance sheet, improve its core business, and even make more investments into renewable and alternative energy. Chevron is a Dividend Aristocrat that has a dividend yield of 3.6%.
Successfully modernizing an old business pays off
James Brumley (Kroger): Admittedly, the grocery business isn't an industry that generally excites investors. This might prove exciting, though: Not only are shares of one of Berkshire's picks logging record highs right now, they're doing so thanks to their 140% run-up from their early 2020 lows. That's the sort of gain not even some of the market's growth tech stocks managed to produce.
It's going to be a tough act to follow. In fact, I doubt the stock will be able to repeat the feat in full. I don't think it's a stretch to suggest Kroger's shares can continue to perform well, though.
NYSE: KR
Key Data Points
Not to oversell it, but Kroger has arguably revolutionized the grocery business. The company has not only seamlessly melded its online and offline shopping experiences, but is developing warehouses specifically meant to support at-home deliveries of some online orders. It's also coordinating those deliveries in-house, and in some markets is bringing those goods to shoppers' doorsteps within half an hour of placing the order.
This automation evolution is key reason the company's fourth-quarter top and bottom lines of $33 billion and $0.91 per share, respectively, were not only better on a year-over-year basis, but were also better than analysts were expecting. Digital sales grew an incredible 105% year over year, but that still only scratches the surface of the online grocery opportunity. The kicker is, Kroger's revenue growth guidance of between 2% and 3% for the year now underway is also better than the analyst community was modeling.
Maybe we should take all the not-so-subtle hints at face value.
This beverage giant has stood the test of time
Keith Noonan (Coca-Cola): Warren Buffett is photographed drinking Diet Coke or Cherry Coke frequently enough that the beverages have become part of his public image. The famous investor has said he regularly consumes five of the sodas a day, and it's clear he's also a huge fan of Coca-Cola's stock.
Coca-Cola stands as Berkshire Hathaway's fourth-largest stock holding and accounts for more than 7% of the investment giant's current stock portfolio. With inflation raging and uncertainty roiling the market, investors are looking for places they can still get a decent return -- and many are parking money with the beverage giant.
While sales volume for sugary carbonated beverages has come under pressure in recent years, Coca-Cola has been making progress further diversifying into new product categories and offering healthier alternatives that better meet the tastes of consumers. On the other hand, the company still has stellar brand strength across its core product catalog, and it's been able to flex this strength to raise prices.
Thanks to its impressive pricing power, Coca-Cola has been able to boost sales and earnings by passing rising costs along to customers. Coca-Cola also pays a substantial dividend, with its current yield coming in at roughly 2.9%, and it recently announced a 4.8% payout increase. The company has held on to Dividend King status for a decade now, having increased its payout annually for 60 years running.
With a fantastic dividend profile and stellar brand strength, Coke has characteristics the Oracle of Omaha treasures, and Berkshire's big bet on the beverage giant has been paying off lately.
