Four times a year, investors are treated to the recent investment decisions of Warren Buffett, CEO of Berkshire Hathaway. Berkshire's most recent quarterly filing came on May 16 and showed that it had purchased eight new stocks: Occidental Petroleum, HP (HPQ -0.48%), Citigroup, Paramount Global (PARA -2.21%), Celanese, McKessen, Markel (MKL -1.05%), and Ally Financial (ALLY -3.14%).
I'm sure that most of these, if not all of them, will make Berkshire money over the long haul. Buffett has an enviable track record with investing. And his No. 1 rule is "Don't lose money." Therefore, we can be sure he expects these stocks to increase in value. However, after looking through these eight stocks, I believe the best of the bunch for potential market-beating returns is HP. Here's why.
But first some honorable mentions
Let's begin with a caveat: I don't follow every industry. I mainly focus on consumer goods and technology. So perhaps I'm not fully appreciating some ideas, like Occidental Petroleum and Celanese. But as Buffett's investing partner Charlie Munger says, "Our job is to find a few intelligent things to do, not to keep up with every ... thing in the world."
On that score, Paramount Global, Markel, and Ally Financial also make my list of interesting ideas from Berkshire.
Across its streaming services, Paramount Global now boasts 62 million subscribers. And robust subscriber growth caused direct-to-consumer (DTC) revenue to surge 82% year over year in the first quarter of 2022. Unfortunately, DTC costs are increasing faster than revenue, hurting Paramount's overall profits. And analysts expect profitability to keep falling this year, which may make Paramount stock a value trap -- a stock that looks cheap but whose shareholder value is eroding. However, its surging popularity in streaming makes it worth watching.
Turning to Markel, it's similar to Berkshire Hathaway. It owns many stocks in its investment portfolio, including several that Berkshire Hathaway holds -- it even holds Berkshire Hathaway stock itself! For a company like this, you want to watch its book value per share. Over the past decade, Markel has grown its book value considerably -- around 160%, according to YCharts. However, this actually trails the return of the S&P 500 over this time, implying that some of Markel's investments have been below average. But, like Paramount, it's still worth watching.
Finally, Ally Financial also deserves an honorable mention and for some of the same reasons as HP. As the chart shows, Ally Financial has increased shareholder value by regularly repurchasing shares and increasing its dividend payouts -- a trend that should continue as long as the business is healthy.
ALLY Average Diluted Shares Outstanding (Quarterly) data by YCharts
The bulk of Ally's business is in auto lending, which could get challenging in the near term with the possibility of a recession. However, the company has a growing digital banking business as well, which could make this an interesting fintech stock.
Why I like HP most here
HP makes computers, printers, and more. And of the eight stocks purchased by Berkshire Hathaway in the first quarter, HP has reduced its outstanding share count the most over the past five years. And over this time, it's increased its dividend the second most, trailing only Ally Financial.
HPQ Average Diluted Shares Outstanding (Quarterly) data by YCharts
To be clear, HP is a mature company without much growth -- revenue is up only around 30% over the past five years. However, because the company keeps buying back stock, per-share returns -- your returns -- are far better. And this is a big reason why HP is beating the market over the past five years, even though its growth is lackluster.
I believe it's reasonable to assume HP can at least maintain its market share in computers and printers. Granted, the company sold fewer personal computing and printer units in 2021 -- and through the first two quarters of its fiscal 2022 -- than in the respective prior-year periods. However, this comes after strong unit growth in 2020. Therefore, HP seems to simply be falling back to historical sales levels.
Personal computing isn't going away, and neither are printers. Therefore, I believe HP has a business that will be viable for years to come. And if that's the case, then HP's business will keep profiting. As it generates profits over the next five to 10 years, it will be buying back stock and boosting dividend payouts as it's been doing in past years. And this is why I believe it can be a market-beating investment.
Oh, and HP is also trading within 10% of its lowest price-to-earnings valuation in the past five years. So now appears to be an opportune time to pick up shares.
