If Warren Buffett has proved anything during his 57-year tenure as Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) CEO, it's the power of patience. Despite not using any fancy charting tools or chasing the hottest stock tips or growth trends, Buffett has overseen the creation of more than $730 billion in value for shareholders (himself included), and delivered an aggregate return on Berkshire's Class A shares (BRK.A) of over 4,000,000%!
Even though the Oracle of Omaha, as he's come to be known, isn't going to be right all the time, riding his coattails has become a moneymaking proposition more often than not for individual investors and Wall Street professionals. Thus, when stock market corrections strike, it pays to go hunting for bargains in Berkshire Hathaway's portfolio.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
As we steam ahead into May, the following three Buffett stocks are on sale and begging to be bought hand over fist by opportunistic investors.
Bank of America
The first Warren Buffett stock investors can confidently buy hand over fist during this latest market pullback is money-center giant Bank of America (BAC 1.70%). BofA is Berkshire Hathaway's second-largest holding and makes up 11.2% of its invested assets.
The big concern for bank stocks, and the reason the financial sector has taken it on the chin in recent weeks, is the growing likelihood of a U.S. recession. Last week, the U.S. Commerce Department reported a 1.4% decline in first-quarter gross domestic product (GDP). Rapidly rising inflation, coupled with the Fed turning hawkish, could put the brakes on economic growth. For banks, it means fewer loans and the potential for higher loan losses and/or delinquencies.
However, the Bank of America that was a seemingly over-levered mess in the late 2000s is long gone. What you see today is a well-capitalized bank with a fiscally prudent management team that's hell-bent on rewarding shareholders with a hearty capital return program.
The single biggest catalyst working in BofA's favor is the central bank turning hawkish. No money-center bank is more sensitive to shifts in the interest-rate yield curve than Bank of America. As the Fed boosts rates, BofA will see a sizable boost in net interest income from outstanding variable-rate loans. According to the company, a 100-basis-point parallel shift in the interest-rate yield curve should generate an extra $5.4 billion in net interest income over 12 months. That's not pocket change!
Bank of America is also benefiting from its digitization push. As of the end of March, it had 42 million active digital banking users and saw 53% of total sales completed online or via mobile app. This is up from just 30% of all sales being completed digitally in the comparable quarter three years ago. Because digital transactions are far less costly than in-person and phone-based interactions, this digital shift has allowed BofA to consolidate some of its branches and lower its operating expense.
And, as noted, CEO Brian Moynihan has a rich history of rewarding shareholders via dividends and buybacks (with Fed approval).
Shares of Bank of America are currently going for just 9 times Wall Street's forecast earnings for 2023 and sport a reasonably low 24% premium to book value. There looks to be ample upside for patient investors.
The 2024 Chevy Equinox EV will start around $30,000. Image source: General Motors.
General Motors
The second Warren Buffett stock to buy hand over fist in May is a company that's been on this list multiple months in a row: automaker General Motors (GM 4.37%).
Auto stocks like GM are facing a triple whammy at the moment. First, they're dealing with historic supply chain challenges, including a shortage of semiconductor chips used in next-generation vehicles. Second, the COVID-zero strategy being employed by China is creating sizable supply and retail demand disruptions in the largest auto market in the world. And third, historically high inflation and the aforementioned rising prospect of a recession could temper demand for auto loans and purchases of new vehicles.
Despite all these worries, General Motors appears ready to capitalize on a multidecade growth boost spurred on by the electrification of consumer vehicles and enterprise fleets.
Last year, General Motors upped its commitment to cleaner vehicles by pledging $35 billion in aggregate spending on electric vehicles (EVs), autonomous vehicles, and battery research through the end of 2025. According to CEO Mary Barra, GM plans to launch 30 new EVs globally by the end of 2025, with a goal of producing more than 1 million EVs annually in North America by the midpoint of the decade. The company should also have two battery factories up and running by sometime next year.
Early indications suggest EV demand is running strong. Following GM's first-quarter earnings release, Barra's letter to shareholders pointed to more than 140,000 reservations for the 2024 Chevy Silverado EV, which will go into production in 2023. The company's Chevy Equinox EV also plans to dangle the value carrot to buyers with a price tag starting around $30,000.
In spite of China's recent woes, there's plenty of EV market share up for grabs in the world's leading auto market. Although China's COVID-19 policies could lead to a decline in deliveries in 2022, GM has delivered 2.9 million vehicles in China in back-to-back years. In other words, it has the branding and deep pockets to become a major EV player.
With the company sticking to its full-year guidance, investors have the opportunity to purchase shares of GM for less than 6 times forecast earnings. Even for the cyclical auto industry, this is incredibly cheap and one heck of a bargain for long-term investors.
Image source: U.S. Bank.
U.S. Bancorp
The third Warren Buffett stock investors can buy hand over fist in May is longtime Berkshire holding U.S. Bancorp (USB -0.20%). Yes, another bank stock!
The concerns I described above with BofA hold true for U.S. Bancorp, which is a regional-banking behemoth. The growing prospect of a U.S. recession, which wasn't helped by a negative GDP print in the first quarter, could lead to higher charge-offs and loan delinquencies. Since bank stocks are cyclical, they tend to perform poorly during recessions.
However, there's another side to this coin. Even though recessions are an inevitable part of the economic cycle, they only last a few months or a couple of quarters. By comparison, periods of economic expansion are known to last for years. Bank stocks like U.S. Bancorp (the parent of U.S. Bank) give long-term investors the opportunity to take advantage of these long-winded periods of economic expansion.
One of the things that makes U.S. Bancorp so attractive is its fiscal discipline. While most big banks were chasing riskier derivative investments during the financial crisis more than a decade ago, U.S. Bancorp has primarily stuck with the bread-and-butter of banking: loan and deposit growth. Avoiding riskier investments allows it to generate a higher return on assets than its peers, as well as bounce back from recessions more quickly.
Furthermore, if you thought BofA was doing a bang-up job of shifting its focus to digital banking, you should take a closer look at U.S. Bancorp. Between the beginning of 2020 and the beginning of 2022, the percentage of loan sales completed digitally rose from 45% to 65%. What's more, the total number of transactions completed digitally jumped 10 percentage points over this time frame to 82%. With such high digital engagement, U.S. Bancorp has been able to consolidate its branches and reduce its operating expenses.
Perhaps most exciting of all, U.S. Bancorp hasn't been this cheap in at least 10 years, based on Wall Street's forward-year earnings forecast. A share can be purchased right now for a multiple of 9.4 times next year's projected profit. That's an incredible bargain for a bank stock that continually delivers for its shareholders.
