Warren Buffett is considered one of the best stock-pickers in the world. But not even his choices turn out to be unfettered winners all the time. Every now and then, one of the holdings in Buffett's holding company Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) hits a wall. And sometimes, that wall is apt to be insurmountable for far too long.
With that as the backdrop, here's a look at two Buffett/Berkshire stocks that might be down but aren't out, and a third name that is best left alone until further notice.
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Stock to buy: Citigroup
Berkshire Hathaway's position: 55.1 million shares valued at $2.9 billion.
Citigroup (C 2.82%) is the country's fourth-biggest bank as measured by assets. The past several months have been tough for all of the banking industry's stocks. Rising interest rates are increasingly causing would-be borrowers to balk at taking out new loans. The Mortgage Bankers Association reports that during the final full week of May, demand for mortgages fell to its lowest level since 2018.
In the meantime, if the economy suddenly weakens, lenders could suffer more loan defaults than might have been expected just a few weeks back. A tepid economy also works against banks' brokerage and trading businesses, as well as their investment banking operations. Given this, it's no wonder the average bank stock has lost around 20% of its value just since January.
In some cases, though, doubting investors have overshot their target, forgetting that higher interest rates make lending more profitable even if fewer loans are made and more of those loans default. Citigroup is one of those examples: With its stock down 25% since February and now down by a third for the past 12 months, the market has priced in a calamity that just isn't apt to happen.
Sure, Citi will have to navigate choppy waters ahead. It can do it, though, particularly because CEO Jane Fraser firmly believes a recession is likely, and is taking steps now to minimize any potential impact. Better still, with the stock priced at less than eight times this year's projected earnings and less than seven times 2023's likely per-share profits, if Citigroup merely meets its estimates, that leaves room for the stock to climb.
Bonus: Newcomers will be plugging into Citi shares while the dividend yield is at a healthy 3.9%, which is one of the highest yields among all the major banking stocks right now.
Stock to buy: Paramount Global
Berkshire Hathaway's position: 68.9 million shares valued at $2.6 billion.
If the name Paramount Global (PARA 2.91%) doesn't ring a bell as a publicly traded company, there's a reason. Until February, it was known as ViacomCBS, which was the combination of film and TV studio Viacom and broadcast television network CBS. Paramount was part of that mix as well, under the Viacom umbrella. Movies were, and still are, only a small part of its total revenue, though. Even with a new name, Paramount Global is still mostly an at-home TV play.
And there's the rub. Traditional television is a dying business thanks to streaming, so why buy into it?
Because Paramount is not only positioned to benefit from the cord-cutting movement, but is also at least partly a cause of it. The media giant is the name behind free-to-watch, ad-supported multichannel platform Pluto TV, and is enjoying major traction with on-demand streaming service Paramount+.
As of the latest tally, Pluto TV is used by 68 million people per month, while Paramount+ has around 40 million paying subscribers. Counting its other streaming services, the company has a total of 62.4 million on-demand streaming customers, who collectively drove Paramount's direct-to-consumer revenue up 82% year over year during the first three months of 2022, with sales expected to grow 7% this full year. Given all of this, it's surprising that shares aren't performing better.
It's still a work in progress; no company really knows what the home entertainment landscape will look like once cable TV is completely put in the past. But with franchises like Star Trek and the recent Top Gun sequel -- and with channels like BET, MTV, and Comedy Central -- there's little reason to doubt Paramount Global is ready for whatever the future holds.
Stock to avoid: Celanese
Berkshire Hathaway's position: 7.9 million shares valued at $1.1 billion.
Things aren't looking up for every Berkshire Hathaway holding. Celanese (CE 0.72%) could be at an "as good as it gets" moment, with nothing but headwinds on the horizon.
It isn't a household name. Celanese makes a variety of chemicals and specialty materials. Artificial sweeteners, lithium battery components, packaging, kitchen appliances, waterproofing, and automobile manufacturing are just some of the sectors it does business in. Odds are good you're a regular user of at least one of its products right now without even realizing it.
And yes, Celanese has benefited from recent rampant inflation, by virtue of increased pricing power for its products. Although its costs are up as well, its customers will still pay almost any affordable price to produce goods that can be sold quickly in a booming, recovering economy.
That's how last quarter's top line was up more than 11% year over year, and the reason Celanese raised its full-year profit guidance to near last year's bottom line of $4.50 per share. Even against a backdrop of a few new economic red flags, late last month the company announced a price increase for products used in a variety of consumer and industrial products. The stock has performed better than most as well, even if it's been uncomfortably volatile.
But we're entering a tricky and dangerous environment for many basic-materials companies. Costs might or might not come down, but even the slightest of economic headwinds could cause Celanese's customers to suddenly, defensively tighten their purse strings.
We don't know what is in the cards, and the fact that Berkshire Hathaway still owns Celanese suggests Buffett and his acolytes aren't too worried about the prospects. There are a bunch of other (and bigger) holdings in that portfolio to buffer against weakness from this particular stock. But you might not have the same cushion.
