It's scary out there these days. When you consider high inflation, an uptick in layoffs, stocks in a bear market, and an uncertain economic outlook, it makes sense that investors are worried. Still, if there's an upside to a down market, it's that the scarier things look, the more likely it is that the market may be serving up great companies with superb long-term staying power at reasonable prices.
In times like these, it's a good idea to consider what Warren Buffett, one of the all-time great investors, would invest in during this challenging time. With that in mind, we asked three investors to name Buffett stocks that can make it through today's messy market. They picked Apple (AAPL -0.11%), Amazon.com (AMZN 0.47%), and Buffett's own Berkshire Hathaway (BRK.A 0.95%) (BRK.B 1.02%).
Read on to learn their thinking behind these choices. Then decide for yourself whether any of these Buffett stocks deserve a spot in your own portfolio.
Image source: The Motley Fool
Such juicy potential!
Eric Volkman (Apple): Tech stocks are hardly the equity assets of choice for investors right now, but a weakened share price makes me even more of a believer in one of the sector's all-time greats -- Apple. Buffett's a huge believer in Apple, too. He's now one of the company's top shareholders through Berkshire Hathaway. In fact, Apple now comprises nearly 40% of the company's equity portfolio.
Yes, Apple has had its difficulties lately, particularly with the supply chain issues nearly every other business that makes a product is contending with. But look how the company has performed and how it relentlessly positions itself for continued growth. Looking back at the recent past, from fiscal 2017 to 2021, the company has managed to grow its revenue by 60% and post net profit margins that have landed consistently in the low- to mid-20% range.
Although the iPhone product line is over 15 years old, it retains strong market share and keeps burnishing its higher-end cachet. As such, it's a great anchor product for the company. Zooming out a bit, sales are rising robustly with other revenue streams, notably services.
Meanwhile, new(ish) businesses for Apple, such as the line of M1 computer chips and financial services centered around its Mastercard-branded credit card, hold great promise for expanding the top line even more. Given those rich bottom-line margins, this should lift the company's net profit substantially, too.
Analysts are as convinced as I am that Apple's fundamentals will keep heading skyward. Collectively, for this fiscal year, they're modeling a 9% year-over-year improvement in per-share net profit on the back of an 8% rise in revenue. Although those figures drop to a respective 7% and 6% for 2023, that's still impressive, given how mature the company is and the competitiveness of most of its product lines.
I'm willing to bet that Buffett stays the course with Apple or (as he's done before) add to Berkshire's already-massive stake. Everyone else should either hold on for the ride or hop onto the train.
Amazon's lower stock price is an opportunity for investors
Parkev Tatevosian (Amazon): One of my favorite Warren Buffett stocks during this messy market is Amazon. The e-commerce giant has turned into an everything store that also builds robust revenue streams outside of online sales. Its Amazon Web Services (AWS) segment, in particular, is poised to remain resilient, even through market turbulence.
In its most recent quarter, AWS grew revenue by 37%. That was higher than the 32% it grew in the same quarter the previous year. The increase means it now consists of 16% of Amazon's overall revenue, up from just 13% in the same quarter last year. That's crucial because the segment boasted an operating profit margin of 35.3% in its quarter ended in March.
Longer term, the growth of higher-profit business opportunities has lifted Amazon's operating profit margin from 2.1% to 5.3% from 2015 to 2021. For that reason, the trend of AWS growing its share of overall revenue is great news for Amazon's profits in the long run.
AMZN PE Ratio data by YCharts.
Admittedly, Amazon's online sales may face difficulty as consumers shift their shopping habits closer to pre-pandemic levels -- which means more brick-and-mortar trips. However, investor concerns over this reversal has caused Amazon's stock price to drop 43% off its highs. The decrease has created an opportunity for investors to buy Amazon's stock at a price-to-earnings ratio of 52, which is near the lowest it's been in the last five years.
During these volatile market conditions with elevated uncertainty, it's good to consider resilient companies like Amazon that can make it through the storm.
A business built for Tough Times
Chuck Saletta (Berkshire Hathaway): There are few businesses as well-positioned as Berkshire Hathaway, which is led by Warren Buffett, for the awful combination of high inflation and a weak economy that we're facing today. Its core insurance business has something of a natural inflation hedge built in. After all, as asset prices increase due to inflation, so do insurable interests, and thus the justification for higher premiums.
On top of that natural hedge, consider Berkshire Hathaway's wholly owned subsidiaries. That list is chock-full of food, transportation, energy, clothing, and housing-related companies. These types of businesses can keep some level of demand in even the worst economic conditions. After all, you need to eat, live somewhere, keep yourself clothed and from freezing, and get the basics from point A to point B no matter what else is going on.
As if that weren't enough, Berkshire Hathaway's balance sheet is generally considered fortress-like, with the company often chided for carrying too much cash. While cash is a little problematic in inflationary times, it's important to understand why Berkshire Hathaway has so much of it. In general, it's because its insurance and subsidiary businesses generate a whole bunch of it, and Buffett generally only wants to invest that surplus cash when he sees a good deal.
That combination adds up to a business that's built to make it through very tough times and emerge stronger on the other side. Indeed, it was that very structure that enabled Buffett to actually provide rescue financing at sweetheart terms for himself during the financial crisis.
When the future is as uncertain as it seems like it is today, I'm not sure there are any companies that are better suited than Berkshire Hathaway for whatever comes next.
Strong companies make it easier to invest during tough times
Although Apple, Amazon, and Berkshire Hathaway generally operate in different parts of the economy, they've all got great qualities that attracted Warren Buffett, one of the world's greatest long-term investors. It's never easy to invest when times feel as tough as they do today, but with great companies like these, it just might be feasible to stay invested for a brighter tomorrow.
