Warren Buffett is one of the all-time greats when it comes to finding winning investments in challenging markets. Through recessions, periods of high inflation, wars, pandemics, and other tough market conditions, the Oracle of Omaha has guided his conglomerate Berkshire Hathaway -- and its impressive stock portfolio -- to market-crushing performances, and inspired generations of analysts and investors along the way.
With a nod to Buffett's incredible track record, three Motley Fool contributors have singled out a few stocks in the Berkshire Hathaway portfolio that they think look like great buys in this wild market. Here's why they see Coca-Cola (KO 2.14%), UPS (UPS 0.02%), and StoneCo (STNE 0.26%) as great investment candidates on the heels of their recent pullbacks.
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Coca-Cola isn't the company you might think it is
James Brumley (Coca-Cola): A bunch of consumer goods companies got bitten by the inflation bug in the first quarter as rising freight and commodity costs dramatically crimped their profits. Yet things have worsened since then. The annualized wholesale inflation rate reached a multidecade high of 10.8% last month. That would seem to be just as much of a problem for Buffett holding Coca-Cola as it is for any other company of its ilk, which may be why the stock is now down 12% from its April peak.
What might be less obvious to many, however, is that Coca-Cola isn't exactly in the bottling business anymore -- the part of the beverage operation where inflation will cause the most pain. It's mostly in the licensing business: It allows third-party bottlers to use its flavors and brand name to make the actual drinks in exchange for royalty payments. Royalties, of course, have no real operating "costs" associated with them, which makes them high-margin revenue.
This business model more than supports Coca-Cola's current dividend payment. Even during a first quarter that was tough for reasons other than price increases, the company's earnings of $0.64 per share easily covered the payout of $0.44 per share. This quarter's projected profits of $0.67 per share will easily cover the next one.
None of this is to suggest the company is completely shielded from the impact of inflation. Its royalty revenue is linked to the sales of its licensed products, and if they become too pricey for too many consumers, people could cut back on their purchases, which could become a noticeable problem. Loyalty within the beverage market tends to be pretty firm, though, even when prices are rising on their brands of choice.
A lot to like at an attractive price
Daniel Foelber (UPS): Inflation is showing no signs of slowing down -- pressuring global markets in equities, bonds, cryptocurrencies, and housing. Some investors are choosing to shift their portfolios away from more speculative growth assets toward stable companies with strong balance sheets, positive cash flows, and histories of steady dividend payouts. And those are exactly the kind of businesses that make up the bulk of Buffett's portfolio.
UPS and FedEx (FDX 1.37%) were stock market darlings in 2020 and 2021 as both benefited from the sharp growth in e-commerce and a rebound in business-to-business deliveries. After a record 2021 performance, UPS raised its dividend by 49%. At today's share price, it now has a yield of 3.5%. FedEx followed suit on June 14 with a 53% dividend hike, which at the current share price gives it a yield of 2%. That yield may not sound all that impressive, but the announcement of the payout boost helped FedEx shares pole vault by 9% in one day.
Not only does UPS have a higher yield than FedEx, but I also think it has much better management. CEO Carol Tomé has done a phenomenal job steering UPS through the pandemic-induced challenges. Despite its large dividend raise, UPS is still guiding for a payout ratio of just 50% -- so the dividend isn't eating too much into its earnings. What's more, UPS is a much more efficient business than it used to be. It now sports a 10-year high operating margin of 13.5% compared to just 7% for FedEx.
UPS has all the qualities investors look for during good times and bad. It is the largest package delivery company in North America. It has a strong balance sheet and an excellent dividend yield. It has good leadership. It has long-term growth opportunities domestically and internationally. And the stock is inexpensive -- trading at a price-to-earnings ratio of just 14. Add it all up, and -- down 26% from its all-time high -- UPS looks like a well-rounded buy.
This beaten-down fintech could serve up a massive rebound
Keith Noonan (StoneCo): Brazilian financial technology services provider StoneCo stands as one of the worst-performing stocks in the Berkshire Hathaway portfolio. Luckily for Buffett, it makes up a very small portion of the conglomerate's overall holdings -- but the fintech's declines are still eye-catching. StoneCo's share price has fallen more than 50% year to date, and it's down roughly 91% from the all-time high it hit early in 2021.
Like other growth-dependent companies, StoneCo's valuation has plunged as investors have become more cautious due to the current macroeconomic risk factors. Making matters worse, the company also faces some business-specific challenges that have contributed to its stock collapse.
While inflationary pressures are creating uncertainty in many parts of the world, Brazil has been hit particularly hard. The country's economic recovery from its pandemic-induced downturn has also been relatively muted, which has seriously impeded some of StoneCo's growth initiatives. Facing a highly unusual economic backdrop, Brazil's government implemented new regulations around lending standards. These changes essentially crushed StoneCo's credit business and left its shareholders looking ahead to a large impending write-down.
As disappointing as that development was, StoneCo's payment-processing service business has continued to deliver impressive performance, and the sell-off of the stock appears to have been overdone. Overall revenue surged approximately 139% year over year last quarter, and shares continue to look undervalued at current levels. The Brazilian fintech now has a market capitalization of roughly $2.6 billion, and is valued at roughly 25 times this year's expected earnings and less than 1.5 times expected sales.
Despite looming write-downs from the credit side of the business, StoneCo still has a clear path to long-term growth. I think this is a case where investors can benefit from Buffett's advice to be greedy when others are fearful.
