2022 has been a challenging year for investors, with a bear market fueled by surging inflation and stalling economic growth. However, long-term thinkers are seeing the current economic uncertainty as an opportunity and aggressively picking up fundamentally strong businesses at steep discounts.
Warren Buffett has been one of the brightest minds on Wall Street for decades. Hence, the entire market has a keen eye on Berkshire Hathaway's portfolio to see what Buffett and his investing team are buying and selling.
As per its recent 13F filing, Berkshire Hathaway has increased its stake in Activision Blizzard (ATVI) and Ally Financial (ALLY 0.13%). Here's why I think both of these stocks could be solid long-term investments.
Activision Blizzard
Activision Blizzard owns some of the largest gaming titles in the world, such as Diablo, World of Warcraft, Call of Duty, and the mobile game Candy Crush.
Back in January, Microsoft announced its intention to acquire the company for $95 per share, but at recent prices, Activision Blizzard's stock was trading around $80, almost 16% lower. The discount can be attributed to the Federal Trade Commission's (FTC) ongoing regulatory review of the proposed deal. However, this price gap may soon close. Per Dealreporter, Microsoft seems to have complied with the FTC's second request for certain documents as part of the assessment of this deal. This is seen as a major milestone for the merger, considering that the agency has to complete the review of the deal within 30 days after the buyer and seller comply the second request for data.
Buffett has long been poised to take advantage of this situation; Berkshire added substantially to its Activision Blizzard position in the first quarter and increased its stake from 64.3 million shares to 68.4 million shares in the second quarter.
However, even if the deal does not go through, Activision Blizzard's financials are quite strong. The company's revenue and net income rose 8.9% and 22.8%, respectively, in 2021 despite strong prior-year comps. The company earned nearly 73% of its revenue from in-game purchases and gaming subscriptions in the second quarter (ending June 30), thereby reducing its reliance on the success of any single gaming title. The company has a strong balance sheet, evident by its net cash position of $7.1 billion.
Activision Blizzard is also gearing up for new versions of already famous gaming titles in the coming quarters, such as Call of Duty: Modern Warfare II, Call of Duty: Warzone 2.0, World of Warcraft, and Overwatch 2. Thanks to its strong fan base (361 million monthly active users in the second quarter), these new launches can significantly boost both product sales and in-game purchases of Activision Blizzard in future quarters.
Ally Financial
Shares of Ally Financial, an online bank focused on auto lending, are down by 25% so far this year on fears of reduced car demand and declining used car prices in a recessionary environment. Analysts and investors are worried about the potential decline in credit quality and a rise in delinquency rates in the coming quarters. These fears are well founded since the company's 30-plus-day retail auto delinquency rate jumped from 2.02% in the first quarter to 2.52% in the second quarter (ending June 30). The rapid rise in benchmark interest rates has also resulted in worries about an increase in the company's cost of capital since retail deposits make up almost 90% of the bank's funding sources.
Despite these cons, there are several pros that make it worthwhile to consider buying this stock now. Ally Financial has relationships with 22,400 U.S. auto dealers. This broad and deep dealer network is not only a major driver for loan originations but also a key entry barrier for competition. The company reported a 3% year-over-year increase in retail auto loan applications, which is impressive considering overall auto industry sales were down 19% year over year in the second quarter. With a major chunk of loan applications stemming from higher-income groups, loan default risk is significantly reduced.
Ally Financial reported $13.3 billion in auto loan originations in the second quarter, the highest quarterly level reached since 2006. The company expects demand to remain strong in the auto market at least in the short run since 4 million to 5 million consumers are estimated to have not been able to purchase vehicles due to inventory shortages.
Besides auto lending, Ally Financial also offers other financial services such as mortgage finance, credit cards, and brokerage services. This has opened up several cross-selling opportunities to its existing auto loan user base.
Ally Financial is also quite cheap, trading at 5.06 times earnings, the lowest it has been since the pandemic-driven market crash of early 2020. The stock is also trading at a significant discount to the financials sector average around 14 and the U.S. market average of 25..
In the second quarter, Berkshire Hathaway increased its stake in this leading auto lender from 9 million shares to 30 million shares. Considering Ally Financial's strong growth prospects and low valuation, this could prove to be an attractive investment for Buffett and those of us who look to him for ideas.
