It's been a challenging year for investing, with assumptions made in January now needing reassessment in the middle of the year. Few could have predicted a war in Europe, ongoing COVID-19-related restrictions in China (notably in the manufacturing region of Shanghai), and supply chain issues persisting in their virulence.
As such, all three of the stocks discussed here -- one bought in the first quarter by legendary investor Warren Buffett's Berkshire Hathaway and two by highly respected hedge fund manager William Von Mueffling's Cantillon Capital Management -- have underperformed the market. But, of course, this means they are potentially a good value. So let's take a closer look.
1. Alphabet
Cantillon added Google owner Alphabet's (GOOGL -0.12%) (GOOG -0.10%) stock to its existing holding, which now stands at nearly 6% of its portfolio value. Investors buy Alphabet stock for what it is now as much as what it could become in the future.
Everyone knows about Google's dominant position in search and Google Cloud's potential to generate vast streams of recurring cash flow in the future as it garners customers.
However, the staggering amount of free cash flow (FCF) that Wall Street analysts expect Alphabet to generate -- $267 billion in the next three years alone -- is the key to the investment case for the stock. On top of the FCF, there's already $125 billion in net cash on the balance sheet at the end of 2021.
Of course, what management will do with it all is another question. Indeed, it's not without options (dividends, buybacks, investments, etc.). Nevertheless, given that the $267 billion represents around 18% of the current market cap, it's fair to say Alphabet looks to be a good value.
2. Celanese
Berkshire Hathaway's purchase of chemicals company Celanese (CE -0.60%) has all the hallmarks of a traditional Buffett stock pick. It's not in a fashionable industry (intermediate chemicals used in paint and coatings, electronics, adhesives, packaging, and electrical and electronics products), and it's not a household name. Moreover, given Buffett's track record, it's safe to say Berkshire bought it for its long-term value proposition rather than a near-term call on the direction of specialty chemicals prices.
Celanese benefited greatly from surging chemicals prices last year, but the concern is that sales may slump in the future should rising rates choke off end demand for products that the company's materials are in.
On the other hand, Celanese's operating margin has been on a general uptrend in the past decade. That's because the company has invested in low-cost production plants. In addition, the acquisition of DuPont's mobility and materials business (to be completed at the end of 2022) for $11 billion is intended to generate $450 million of run-rate synergies within four years.
Celanese CFO Scott Richardson says, "We are confident in our ability to capture synergies that would allow us to double Celanese's total free cash flow within the next five years."
Data by YCharts
3. Applied Materials
Von Mueffling is known as a technology investor, so when Cantillon adds to its position in semiconductor materials and equipment company Applied Materials (AMAT 1.45%), it's usually a good idea to take notice.
The industry should be firing on all cylinders now, with semiconductor shortages creating a significant need for investment. Indeed, Applied Materials sales are growing -- analysts expect double-digit growth in 2022 and 2023. Moreover, key customers like Intel, Samsung, and Taiwan Semiconductor are all ramping up capital spending.
Data by YCharts
However, the problem is, in the words of CEO Gary Dickerson, "we remain constrained by ongoing supply chain issues" -- a familiar story in the technology world.
That said, investors should look beyond the near-term issues because the semiconductor industry has plenty of long-term demand growth drivers -- not least, as chips are being increasingly integrated into everyday devices. Examples include the explosion of internet-enabled devices in wireless equipment, intelligent systems in automotives, or industrial automation. In addition, these technologies will increase in adoption due to 5G rollouts and increasing use of advanced data analytics. These are secular growth trends that will carry on long after the supply chain issues of 2022 and 2023 are forgotten.
