Warren Buffett's jaw-dropping success in creating long-term wealth has been the talk of Wall Street for several years now. The legendary investor is famous for picking fundamentally strong stocks that are trading at a discount to their intrinsic value. However, since growth stocks ruled the market in the last decade, Buffett's investment style seemed to be largely overshadowed. But things have been changing rapidly in the past few months. With the rising volatility in the U.S. equity market related to higher-than-expected inflation and escalating geopolitical tensions, many retail investors are now keen to follow this Oracle of Omaha's investing footsteps.
For those investors who are on a limited budget and wish to piggyback on the smart investing tactics of Warren Buffett and his investment team, Coca-Cola (KO 2.20%) and Nu Holdings (NU -2.11%) can be attractive picks. While beverage giant Coca-Cola has been a Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) favorite since 1988, Brazilian fintech company Nu Holdings is a recent addition to the portfolio and received a $1 billion investment from the asset management company in the fourth quarter (ended Dec. 31, 2021). Despite the dramatic difference in the tenure of these stocks in Buffett's portfolio, they could prove to be attractive bets in 2022 and beyond. Here's why.
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1. Coca-Cola
As the longest-tenured position and the fourth-largest in value in Berkshire Hathaway's portfolio, Coca-Cola seems well poised to benefit from the world's return to normalcy after the pandemic. Demand is expected to rise as people start visiting movie theaters, restaurants, and convenience stores. With rising consumer mobility, Coca-Cola was successful in cautiously passing higher commodity costs to customers, which resulted in about a 6% hike in average beverage prices in fiscal 2021 (ended Dec. 31, 2021). The company seems to be a good defensive investment in the high-inflation environment of 2022, especially for retail investors preferring to shift away from speculative growth stocks amid heightened market turbulence.
Coca-Cola's beverages (over 200 brands across soft drinks, energy drinks, teas and coffees, and alcoholic drinks) are currently available in more than 200 countries. In fiscal 2021, the company's net revenues were up 17% year over year (YOY) to $38.7 billion, while adjusted earnings per share (EPS) jumped 19% YOY to $2.32. The company also managed to end fiscal 2021 with its non-alcoholic ready-to-drink market share for at-home and away-from-home channels above 2019 (pre-pandemic levels).
Coca-Cola pays a solid dividend yield of 2.68% and announced its 60th consecutive annual dividend hike in February 2022. The company also plans to resume share repurchases worth $500 million in 2022. The company is cash-flow positive and recorded a free cash flow (FCF) of $11.3 billion in fiscal 2021, up 30% YOY. With a dividend payout ratio of 55.64%, far below the company's long-term target of 75%, Coca-Cola has significant funds to continue to return value to shareholders for several more years.
Coca-Cola's share prices are up by over 23% in the last year. The company has guided for organic revenue growth of 7% to 8%, EPS growth of 5% to 6%, and $10.5 billion FCF for fiscal 2022. Against the backdrop of strong revenue growth projections (compared to pre-pandemic levels), robust FCF, and healthy dividend payouts, Coca-Cola could be a compelling buy for some investors in 2022.
2. Nu Holdings
Nu Holdings recently announced Q4 earnings (ended Dec. 31, 2021) were stellar, with revenues soaring 224.3% YOY to $636 million and gross profit jumping 207% YOY to $227 million on a currency-neutral basis. The company has been adding 2 million new customers every month and ended fiscal 2021 with a total of 54 million customers. In Q4, Nu reported a 72% YOY hike in monthly average revenue per customer (ARPAC) to $5.6, while the monthly average cost per active customer dropped by 20.4% YOY to $0.9. The company's activity rate (monthly active customers as a percentage of total customers) also rose from 65.6% to 76.3% in the same time frame. All these numbers seem even more impressive considering the recessionary pressures in the Latin American market.
Although Nu's current ARPAC is quite low compared to that of most banks in Brazil ($35 to $38), it is very much in sync with the company's strategy of offering lower-priced banking products for the underserved population in Latin America. The company, however, is well positioned to see expansion in ARPAC in coming quarters, considering that some more mature cohorts (older customers) have already reached ARPAC of $15. Nu also expects newer members to fetch higher ARPAC even faster, owing to higher cross-selling of newer products and features and increased customer engagement.
Nu is not yet profitable, which is normal for an early-stage fintech company. The company currently has a presence in Brazil, Mexico, and Colombia -- three markets that account for 60% of Latin America's gross domestic product and population. Nu has a solid balance sheet, with $3.62 billion cash and a total debt of only $267.3 million. Considering the company's fiscal 2021 revenues of $1.7 billion and target addressable Latin American retail financial services market of $269 billion, Nu has significant room for growth in the coming years.
