Many investors are worried about the near-term direction of the stock market. But remember that Warren Buffett has gotten rich from putting money to work in the market when people are the most pessimistic about the future. As Buffett has often reminded us, you want to be fearful when others are greedy, and greedy when others are fearful.
Bear markets have always been followed by periods of rising stock prices. Three Motley Fool contributors have selected three stocks from Berkshire Hathaway's holdings that they believe are great buys right now. Here's why they like Coca-Cola (KO -0.24%), Amazon (AMZN -1.35%), and Activision Blizzard (ATVI).
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A top dividend stock to anchor your portfolio
Jennifer Saibil (Coca-Cola): Coca-Cola reported first-quarter earnings two weeks ago, proving once again why this Dividend King is an excellent choice for a diversified portfolio.
Coca-Cola is the largest beverage company in the world, with $38.7 billion in fiscal 2021 revenue. Growth took a back seat during the early stages of the pandemic, but as a cash-rich company with an unparalleled distribution system, it managed through that period building on its strengths. Notably, it downsized its brand assortment, slashing it by half to conserve its resources for its core brands. That's helped it emerge as a stronger, more efficient company even as it exits that period.
In the first quarter, sales increased 16% year over year to $10.5 billion, and earnings per share increased 23% to $0.65. At least part of the growth is coming from reopenings, so growth may slow down as it gets past this stage. But the at-home segment saw increases as well, and management has positioned the company to keep up its solid performance in the future. How is it doing that? Aside from the brand selection, it restructured its business for a more simplified process, and it's devoting greater focus to capitalize on digital trends.
Management reiterated that it's committed to the dividend and kept it up throughout, even raising it annually. The stock typically yields around 3%, but that's come down a bit to a current 2.7% as the stock price has climbed.
Between inflation and fluctuating macroeconomic trends, an investor community that's gotten used to a high-flying market gets to see up close how established, well-managed companies offer a secure road to investing success, even though it may appear to be a slower route. That's one of the foundations of Warren Buffett's massive success, and why Coca-Cola has been an anchor in Berkshire Hathaway's portfolio.
Amazon's profitable segments are thriving
Parkev Tatevosian (Amazon): My favorite Warren Buffett stock right now is Amazon. The e-commerce business turned everything store thrived at the pandemic's onset. Amazon was an obvious alternative, with billions of people looking to avoid shopping in person. The company did not disappoint, handling the surge in volume with little trouble. As economies are reopening, the pace of growth is slowing for Amazon. That slowdown, combined with the heavy investments in Amazon's capacity during the pandemic, has brought the stock down 38% off its high.
AMZN PE Ratio data by YCharts
That's created an opportunity for long-term investors to buy Amazon stock near its lowest price to earnings in five years. Meanwhile, Amazon's more profitable business segments are still proliferating. Unlike e-commerce sales, Amazon's web series segment delivers robust operating profits, totaling $6.5 billion in its most recent quarter ended March 31. The segment grew 37% year over year in that same time.
Moreover, Amazon has developed an advertising business that delivered $7.9 billion in revenue in the quarter ended in March. That was 25% higher than the same quarter the year prior. Like Amazon Web Services, advertising is a more profitable business than retail sales. It's no surprise marketers covet the idea of advertising on Amazon, with its more than 200 million Prime members who have a payment method on file and get access to fast and free shipping.
Admittedly, Amazon's e-commerce sales will continue to face headwinds as consumer shopping behavior changes back closer to pre-pandemic habits. That was to be expected. Still, many of the consumers who joined Amazon during the pandemic will stick around long term. It remains to be seen how much of the benefits of the boom in shopping remain longer-term, but whatever the figure is, it will be larger than what Amazon went into the pandemic with. The more significant retail business is now supplemented with a robust advertising segment and booming web services growth.
Activision stock is a win-win scenario for Buffett
John Ballard (Activision Blizzard): Warren Buffett revealed during Berkshire's recent shareholder meeting that the company had increased its stake in video game producer Activision Blizzard. Berkshire now owns 9.5% of Activision.
The stock currently trades at $78, but Microsoft (MSFT -1.96%) announced an all-cash deal to buy the game company for $68 billion, or $95 per share, in January. If the deal is approved by regulators, Berkshire will walk away with an easy 22% return from Activision's current share price. That would translate to roughly a $1 billion gain for Berkshire Hathaway.
Berkshire Hathaway initially bought 14.7 million shares, or about 1.9% of Activision Blizzard, in the fourth quarter. The stock price traded at $66.53 at the end of December, or 16 times Activision's 2021 adjusted earnings per share. The stock fell 35% last year after the California Department of Fair Employment and Housing filed a complaint against Activision Blizzard. The lower share price opened the door for Berkshire to buy shares at a big discount to what Activision may ultimately be worth. Microsoft's offer certainly validated Activision's business value.
Activision Blizzard is one of the largest video game companies in the world, with trailing-12-month revenue of $8.3 billion. It has 372 million monthly active users across all its games, including Call of Duty, World of Warcraft, and the Candy Crush mobile game.
There is a chance that regulators won't grant Microsoft approval to buy Activision. That's why the stock is trading at a big discount to the buyout offer. The acquisition is expected to close before the end of June 2023. If it doesn't happen, Activision would likely trade back down to its pre-acquisition price of around $65.
But if you're in it for the long term, buying Activision stock is a win-win scenario. The prospect of earning a 22% return if the deal gets approved is attractive with the market down year to date. If the deal doesn't happen, investors will own a profitable video game company and get to benefit from its future growth. The downside risk is limited, and this is likely why Buffett is willing to buy Activision stock.
