When it comes to investing prowess, a pretty good argument can be made that Warren Buffett is in a class of his own. Since taking the helm as CEO of Berkshire Hathaway (BRK.A 0.41%) (BRK.B 0.11%) in 1965, he's created approximately $760 billion in value for shareholders (himself included), and delivered an aggregate return for the Class A shares (BRK.A) of 4,186,398%, through this past week.
Even though riding Warren Buffett's coattails has long been a winning strategy, not all Buffett stocks are created equal. Among the roughly four dozen securities currently held by Berkshire Hathaway are two no-brainer buys and one stock that's best avoided like the plague.
Buffett stock No. 1 to buy: Bank of America
Shares of BofA have lost a quarter of their value over the past 10 weeks. It would appear that Wall Street is concerned about the growing prospect of a recession in the wake of historically high inflation. Since bank stocks are cyclical businesses, there's a good likelihood that they'll contend with higher loan delinquencies should a recession materialize.
But there's another side to this coin. Despite being cyclical, bank stocks can take advantage of disproportionately long periods of economic expansion. Even though recessions are an inevitable part of the economic cycle, they typically only last for a few months to a couple of quarters. By comparison, expansions can last for many years. Bank stocks like BofA allow patient investors to take advantage of the natural expansion of the U.S. or global economy over time.
What investors should really appreciate about Bank of America is its interest-rate sensitivity. With the trailing-12-month U.S. inflation rate coming in at 8.5% for March, it's crystal clear that the Federal Reserve is going to do whatever is necessary to quell rising prices. This likely means multiple interest rate hikes are on tap this year.
In its fourth-quarter investor presentation, Bank of America points out that a 100-basis-point parallel shift in the interest-rate yield curve over 12 months would generate an estimated $6.5 billion in added net interest income. There's a good chance we'll easily surpass a 100-basis-point move over the next year.
In addition to bringing in a lot of extra interest income on its outstanding variable-rate loans, Bank of America is benefiting from its users shifting to digital formats. When 2021 came to a close, 41 million BofA customers were actively banking with the company online or via mobile app, with 49% of all sales being completed digitally (up from 31% at the end of 2018). Since digital transactions are considerably less costly than in-person or phone-based interactions, BofA has been able to consolidate some of its branches to further boost its operating efficiency.
Following their recent pullback, shares of Bank of America can be scooped up for less than 10 times Wall Street's forward-year earnings forecast and for just 24% above its book value (as of the end of 2021). That's a bargain for a high-quality bank stock with a rich history of returning capital to shareholders via dividends and buybacks.
Buffett stock No. 2 to buy: General Motors
Similar to Bank of America, shares of GM have been taken to the woodshed in recent months. Since hitting an all-time high during early January, shares of GM have fallen 40%. Wall Street is clearly worried about persistent semiconductor shortages and how they are hurting the production of new vehicles.
However, there's good news here on multiple fronts. First off, we're looking at a supply chain issue and not a demand problem. Consumers and businesses have had a healthy appetite for more fuel-efficient vehicles for years, and it's translating into a number of higher-margin vehicles being traded in -- i.e., more trucks and SUVs, as opposed to sedans -- and replaced by newer, more efficient versions. For investors with a multiyear time horizon, the semiconductor supply shortage shouldn't be a concern.
What's considerably more exciting for General Motors is that its long-awaited shot in the arm of organic growth has arrived. The electrification of automobiles is expected to lead to a multidecade vehicle replacement cycle for consumers and business fleets. It's an opportunity for GM to lift its vehicle margins while delivering far-above-average annual sales growth.
Last year, General Motors increased its spending projection on electric vehicles (EVs), autonomous vehicles, and batteries to $35 billion through 2025. CEO Mary Barra has laid out her company's goals of producing more than 1 million EVs annually in North America by the end of 2025, with two battery plants coming on line by 2023. In total, 30 new EV models are expected to launch worldwide by the midpoint of the decade.
Keeping in mind that the initial customer deposit totaled only $100, early interest in the Chevy Silverado EV demonstrates what's to come for General Motors. Just weeks after unveiling the Silverado EV, Barra noted over 110,000 reservations were placed for the popular truck.
Even if General Motors' earnings forecast were to be cut in 2022 due to supply chain challenges, shares of the company appear far too inexpensive given the accelerated growth it's likely to enjoy from the EV replacement cycle. This makes GM a no-brainer buy at less than six times Wall Street's forecast earnings for 2023.
The Warren Buffett stock to avoid: Kroger
There's no question that things couldn't have gone any better for Kroger over the past two years. First, it benefited immensely from the pandemic. Though panic-buying is rarely ever a positive thing, consumers began stocking up on a variety goods throughout the first year of the COVID-19 pandemic.
It would also appear that the company has received a boost from inflationary pressures. Since Kroger's numerous grocery chains are primarily known for selling basic-need goods, such as food, it's not had any trouble passing along higher costs to consumers.
One final thing I'll note is that the Restock Kroger initiative has paid dividends. Restock Kroger, which emphasizes online ordering, was launched in 2017 and really took shape during the pandemic when direct-to-consumer sales became all the rage.
However, there are a couple of red flags that should keep investors away from Kroger. For starters, comparable-store sales grew by only 0.2% last year if fuel sales are excluded. Although Kroger is having no trouble passing along price hikes to its shoppers, rising costs throughout its supply chain are offsetting these hikes.
Another issue is Kroger's valuation. We're talking about a company that traditionally grows sales by a low double-digit percentage (1% to 3%) that's valued at more than 15 times the midpoint of its full-year earnings forecast. That might not sound expensive, but when you consider that Kroger's board has been repurchasing stock ($1.6 billion in 2021), you'll see that there's very little actual growth behind the company's earnings-per-share figures.
With the U.S. economy likely beyond the worst of the pandemic and inflation expected to taper off in the second half of 2022 and throughout 2023, Kroger's perfect scenario looks destined to come to an end sooner rather than later.