Warren Buffett may be best known as a value investor, but the Berkshire Hathaway CEO has actually warmed to growth stocks over the last decade. The Nasdaq Composite index now trades down roughly 26% year to date, and that suggests that risk-tolerant investors have opportunities to invest in promising companies at big discounts relative to their long-term potential.
With that in mind, a panel of Motley Fool contributors has identified three growth stocks in the Berkshire Hathaway portfolio that stand out as attractive buys on the heels of recent sell-offs. Read on to see why they think Snowflake (SNOW 1.99%), Chevron (CVX -0.50%), and Bank of America (BAC 2.74%) are beaten-down stocks worth betting on.
Dominating forward-looking service categories
Keith Noonan (Snowflake): While Snowflake isn't part of the Nasdaq Composite, the data services company has certainly participated in the broader pullback for growth stocks that's played a big role in shaping the drawdown for the tech-heavy index this year. Snowflake stock has fallen roughly 53% year to date and 61% from the high it hit in 2021, and it stands as one of the worst-performing stocks owned by Berkshire since the beginning of last year.
Even with the big valuation pullback, the stock also still stands out as one of the most growth-dependent stocks in the Berkshire Hathaway portfolio. While the company is posting positive free cash flow, it's still not profitable, and it's currently valued at roughly 25 times this year's expected sales. So, why did Buffett and his team decide to invest in this software stock that's so far removed from the type of valuation profile that Berkshire is best known for?
Along some lines, Snowflake has looked like an almost baffling buy for the investment conglomerate, but it makes much more sense alongside another criteria that the Oracle of Omaha has used to assess winners. Buffett loves a business with a good moat, and the data services company appears to be in the early stages of establishing powerful competitive advantages in service categories that will only become increasingly essential.
Snowflake provides data warehousing and marketplace services that allow enterprises and institutions to combine, buy, and sell valuable information. With energy prices near record levels, people aren't saying "data is the new oil" as frequently as they used to, but there's a good chance the sentiment will come back into fashion before too long. Using data analytics to form strategies and provide services has never been more crucial for large organizations, and Snowflake is building an ecosystem that's helping its customers get the full picture.
Chevron's best days are ahead of it
Daniel Foelber (Chevron): Chevron has gone from a small holding in Berkshire's portfolio to its fourth-largest public equity holding, and for good reason. Chevron has many of the value stock qualities Buffett tends to look for. Its valuation is reasonable. It is an industry-leading company with diverse revenue streams. And it has a multi-decade track record of paying and raising its dividend with a forward dividend yield of 4%.
The integrated oil and gas major may not strike most as a growth stock. However, the global supply/demand imbalance has dramatically shifted for the oil and gas industry over the last couple of years. Oil and gas may gradually lose their percentage share in the global energy mix. But it still underpins the energy that fuels residential users and the transportation, industrial, and power generation industries. Companies like Chevron have a low cost of production and a strong balance sheet, giving them a big advantage to persevere past downturns and capture upside when oil and gas prices rise.
It's boom time in the oil and gas industry right now. As the saying goes, a rising tide lifts all ships. But when times get tough and the tide goes out, a lot of weaker players get hung out to dry. When approaching long-term investments in a cyclical industry like oil and gas, it's important to select companies that won't boom and bust to the tune of the broader market, but rather, have staying power. Given Chevron's holdings in the Permian Basin of West Texas, its growing liquefied natural gas (LNG) portfolio, and investments in renewable and alternative energy, Chevron is the kind of company that could continue growing for decades to come even as economies shift toward lower-carbon fuels.
Down too much for all the wrong reasons
James Brumley (Bank of America): Among all of Buffett's current picks capable of pushing past the Nasdaq's current (and possibly future) weakness, I like Bank of America.
Yes, it's in a banking business that's positioned to bear the brunt of any recession. Not only does economic weakness curtail interest in borrowing, investing, and fundraising, it also tends to present problems for banks' loan portfolios. That's because companies and consumers alike struggle to repay borrowed money when profits or incomes dry up.
The thing is, after last month's 16% tumble from Bank of America shares leaving it more than 30% under highs hit early this year, the bulk of this potential problem is already built into the stock's price -- and then some. The big pullback also pumped up the dividend yield to 2.7%, and while I understand investors are worried an economic headwind could crimp Bank of America's ability to fully fund its dividend, I'm not concerned. The current annualized per-share payout of $0.84 is only a small fraction of the $3.33 per share analysts expect the bank to earn this year, en route to $3.93 per share next year. Even if the company misses those estimates by a country mile, there's still plenty of money left to pay the dividend and still have a little something left over.
I still don't think that's going to be a concern. Even in what could evolve into tougher times ahead, higher interest rates will mean higher profit margins on the loan business Bank of America is likely to win going forward. The only thing you have to do is be like Buffett and bear in mind that this is a long-term holding.