Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) CEO Warren Buffett has a nose for making money. Since taking the reins of Berkshire in 1965, he's led his company's Class A shares (BRK.A) to a mouthwatering average annual return of 20.1%, through Dec. 31, 2021. For those of you keeping score at home, this works out to an aggregate gain of better than 3,600,000%!
Riding the Oracle of Omaha's coattails has long been a moneymaking proposition. It's why investors wait on the edge of their seats each quarter to find out what Warren Buffett has been buying or selling.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
However, not even the world's top investors are infallible. Even the iconic Warren Buffett will be proved wrong from time to time.
What follows are two Warren Buffett stocks that are screaming bargains and can confidently be bought hand over fist right now, along with another Buffett stock that should be avoided altogether.
Buffett stock No. 1 to buy: Bank of America
The first Warren Buffett stock that's a screaming buy at the moment is money-center giant Bank of America (BAC -0.13%).
As a general rule, investors typically don't seek out bank stocks like BofA when the winds of a potential recession are blowing. Because bank stocks are cyclical, recessions have a way of increasing loan delinquencies and charge-offs. In other words, recessions are bad news for the banking industry.
However, this go-around really could be different. At no point in history has the Federal Reserve aggressively raised interest rates into a falling stock market. The nation's central bank effectively has no choice but to raise rates with U.S. inflation hitting a four-decade high. Although hawkish monetary policy has the potential to increase loan delinquencies and charge-offs, it's also a big positive for banks with variable-rate outstanding loans on their books.
What's particularly interesting is that no large bank is more interest-sensitive than Bank of America. In April, the company's investor presentation noted that a 100-basis-point parallel shift in the interest rate yield curve would generate an estimated $5.4 billion in added net-interest income over 12 months. For some context, the Fed has already moved its federal funds target rate higher by 150 basis points, in aggregate, over the past three meetings. As a result, BofA should enjoy a healthy boost in profits from its outstanding variable-rate loans.
Bank of America has become a more efficient bank over time, as well. At the end of March, BofA had 42 million active digital banking customers, which was up 5 million from the comparable period three years earlier. More importantly, 53% of all loans were completed online or via mobile app, up from just 30% during the same quarter in 2019. Digital transactions are substantially cheaper than in-person or phone-based interactions, which has allowed BofA to consolidate some of its branches and lower its expenses.
Although bank stocks are an odd place to consider putting your money to work during a weak market, Bank of America looks like a no-brainer buy at roughly 8 times Wall Street's profit forecast for 2023.
Buffett stock No. 2 to buy: Visa
A second Warren Buffett stock that you can confidently buy hand over fist right now is payment-processing kingpin Visa (V 0.33%).
Similar to BofA, the big concern with Visa has to be the growing prospect of a domestic or global recession. Visa's business is dependent on consumers and businesses spending more over time. But when recessions do occur, spending declines lead to less revenue and profit for payment processors like Visa.
However, this is a two-sided coin that very much favors the optimistic. You see, even though recessions are inevitable, they don't last very long. By comparison, periods of economic expansion often go on for years. Buying a stake in Visa allows investors to take advantage of the natural expansion of the U.S. and global economy over time.
To build on this point, no payment network has expanded more aggressively since the end of the Great Recession than Visa. As of 2020, Visa controlled a whopping 54% of all credit card network purchase volume in the U.S., which was 31 percentage points higher than the next-closest competitor. The U.S. is the world's leading market for consumption.
Something you might not realize about Visa, but which is vital to its success, is that it strictly sticks to payment processing and avoids lending. Although Visa would likely have no issue raking in interest income as a lender, doing so would expose it to potential loan delinquencies when those aforementioned inevitable recessions arise. Because Visa chooses not to lend, it doesn't have to set aside capital to cover loan losses. The end result is that Visa bounces back from economic weakness faster than just about any financial stock.
With much of the world's transactions still being conducted in cash, Visa looks to have a sizable growth runway ahead of it.
Image source: Getty Images.
The Warren Buffett stock to avoid: Snowflake
On the other end of the spectrum is the Warren Buffett stock that investors would be best off avoiding like the plague: cloud data-warehousing company Snowflake (SNOW 2.53%).
Before I dive into the "Why?" aspect of why Snowflake is worth avoiding, let's clear a few things up. First, Snowflake is a Buffett stock, but not a Buffett pick. It's a company that was added to Berkshire Hathaway's portfolio by one of Buffett's investing lieutenants, Todd Combs or Ted Weschler. There's a really good chance Buffett himself has no clue what Snowflake does.
The other thing to note is that Snowflake does bring sustainable competitive advantages to the table. For instance, it's often challenging for businesses to share data across competing cloud infrastructure service platforms. However, with Snowflake's infrastructure built atop the most-popular cloud services, Snowflake members are able to seamlessly share and move data.
Additionally, Snowflake's operating model spurns subscriptions. Instead, it charges users based on the amount of data stored and Snowflake Computer Credits used. It's a far more transparent pricing plan that users really seem to appreciate.
The issue with Snowflake is its valuation. While there's no question that some premium is deserved for its sustainable advantages, it's difficult to support the idea of paying 24 times Wall Street's forecast sales in fiscal 2023 (that's this calendar year). We're witnessing plenty of caution on the hiring and spending front for most tech stocks, which makes it unlikely for Snowflake to reach Wall Street's lofty sales growth forecast of 66% in fiscal 2023.
A tumbling market also tends to tends to bring value into focus. Even though Snowflake has generated an adjusted profit in three consecutive quarters, it's trading at a forecast multiple of 864 times fiscal 2023 earnings and close to 390 times forecast fiscal 2024 earnings.
The point being that Snowflake has a lot of room to grow into its valuation, and it could be years before it does so. There are so many attractive Warren Buffett stocks, which is what makes passing on Snowflake so easy.
