The 2022 bear market hasn't been kind to Warren Buffett's diversified holding company, Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%). Despite Buffett and his team being world-class stock pickers, 84% of the conglomerate's equity holdings are presently in the red for the year. In fact, Berkshire Hathaway's various stock holdings have yielded an average return on capital of negative 14% nearly 10 months into 2022. That's a testament to the widespread impact of this bear market.
Berkshire Hathaway rarely misses on stock picks over the long-term, however. Between 1964 and 2021, it delivered a jaw-dropping total return on capital of 3,641,613%, and one of the key reasons it was able to do that was that Buffett has maintained a laser-like focus on owning high-quality companies with outstanding management teams. So even though this sour market may not be rewarding deep value now, this key aspect of most Buffett stock picks almost always shines through over multiyear holding periods.
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How can investors put this insight to use? Well, Berkshire Hathaway's two worst-performing stocks this year are the luxury furniture retailer RH (RH -1.99%) and the cloud-based data platform developer Snowflake (SNOW -1.99%). The common theme across Berkshire Hathaway's holdings is that they tend to be chock-full of deep value, and these Buffett stocks are no exceptions. Here's why they could be poised for epic turnarounds in the not-so-distant future.
RH: A "Tale of Two Cities" stock
RH has been Berkshire Hathaway's worst-performing stock holding in 2022, down by a whopping 52.2% year to date. After that dramatic sell-off, though, the stock stands out as a table-pounding buying opportunity for bargain hunters.
The core reason RH would make a great contrarian buy now is that its value proposition is being misunderstood at the moment by the broader market. While it is true that RH's core business in luxury home furnishings is somewhat sensitive to conditions in the real estate market, the company primarily targets high-net-worth customers who are capable of either paying cash for homes or using collateral to take out low-interest rate loans.
So, even though RH's top line is forecast to dip by a noteworthy 16% over the course of 2022 to 2023, the market's hasty decision to slash the stock's forward price-to-earnings ratio by 62% -- relative to its 52-week high -- is quite frankly nonsensical. RH's wealthy customers aren't the ones feeling the biggest pinches from inflation or rising interest rates, after all.
The bottom line is that RH ought to continue generating healthy levels of free cash flow even as the broader economy gradually slows down over the next few quarters. What's more, the company's plans to expand into high-growth areas such as hotels, hospitality, and international markets bode well for its long-term outlook.
Lastly, Wall Street analysts' current fair value estimates for RH imply a noteworthy upside potential of 49%. Now, analysts' valuation scenarios should always be taken with a grain of salt. But in this case, there is a compelling argument to be made that this luxury home furnishing stock has indeed fallen too far. A turnaround, therefore, appears to be imminent.
Snowflake: A powerful growth trend
Big tech companies are steadily moving to cloud services as a way to house and subsequently recall large datasets. Montana-based cloud computing company Snowflake has been riding this emerging trend over the last 10 years. And while it has yet to establish a bona fide competitive moat in this jam-packed field, its user-friendly platform has started to land with a core set of clients, resulting in an enormous uptick in sales of late.
In its most recent quarter, for instance, Snowflake reported an 83% year-over-year rise in sales to $497 million. It's on track to become cash flow positive on a consistent basis within the next few quarters. What's more, Wall Street expects the cloud-computing player's top line to rise at a blistering compound annual rate of 36.75% over the next three years. Yet this Buffett stock has lost a staggering 47% of its value over the course of 2022.
Bears have hammered Snowflake this year for two reasons. First, its shares were trading at over 90 times sales early this year. Tech stocks with premium valuations have been prime targets for short-sellers and profit-takers all year long. Snowflake's premium valuation, in particular, has been called into question over concerns that larger cloud-based computing operations could squeeze its profit margins and steal its customers.
Second, Snowflake still isn't consistently profitable, and this moody market has had zero patience for money-losing operations.
All things considered, though, Snowflake's shares appear to have been unfairly punished by this risk-averse market. The company's lightning-fast sales growth ought to put it in the running to become a dominant player in the massive cloud-based computing realm by the end of the decade. And that ultra-fast growth profile is a key reason why Wall Street analysts think Snowflake's shares might be undervalued by an eye-catching 65% right now. So once investors' recessionary fears ease, this top cloud-computing stock could come roaring back.
