It's been a miserable year for Wall Street and investors. Since hitting a record high during the first week of January, the broad-based S&P 500 has gone on to lose as much as 24% of its value and delivered its worst first-half performance in 52 years. The growth stock-focused Nasdaq Composite has performed even worse, with a peak-to-trough decline of 34% since mid-November.
Although sizable declines in the major indexes can be scary, history has shown that these dips are the perfect opportunity for investors to pounce. This is something Berkshire Hathaway (BRK.A 0.68%)(BRK.B 0.60%) CEO Warren Buffett knows all too well.
Image source: The Motley Fool.
Since every bear market and correction is eventually wiped away by a bull market rally, the Oracle of Omaha understands that, with time as an ally, great companies can be purchased at a discount. And what better place for investors to look for incredible bargains than Warren Buffett's own portfolio?
What follows are three surefire Warren Buffett stocks you can confidently buy as the market plunges.
Amazon
The first rock-solid Warren Buffett stock that can be bought hand over fist by patient investors as the S&P 500 and Nasdaq Composite plunge is e-commerce stock Amazon (AMZN 0.91%).
Like all retailers, Amazon is facing headwinds that aren't going away anytime soon. Historically high inflation threatens to reduce discretionary spending for low earners and increase labor expenses. Additionally, a visibly weaker U.S. and global economy is likely to slow sales for its leading online marketplace.
However, none of these headwinds has had any effect on Amazon's sustainable competitive advantages.
NASDAQ: AMZN
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For example, Amazon continues to be the go-to source for online retail purchases. An eMarketer report from March 2022 estimated that Amazon would account for just shy of 40% of all online retail sales in the U.S. this year. That's more than eight percentage points higher than its next 14 competitors on a combined basis. In other words, consumers are still flocking to the company's online marketplace for deals.
But it's not Amazon's marketplace that's critical to the company's long-term success. What's far more important is that growth is sustained in its considerably higher-margin operating segments: subscription services, advertising, and Amazon Web Services (AWS). To this end, it's full steam ahead for Amazon.
As of April 2021, the company had signed up more than 200 million people to a Prime membership worldwide. Considering that Amazon now has the exclusive rights to Thursday Night Football, its Prime member count is likely much higher. Subscription services accounted for about $35 billion in annual run-rate sales as of June 30, 2022.
AWS is also the world's leading provider of cloud infrastructure services, according to a report by Canalys. Cloud growth is still in the very early innings, yet AWS has taken a 31% share of global cloud spending. Even though AWS accounts for just a sixth of Amazon's net sales, it's regularly generating more than half of the company's operating income thanks to the juicy margins associated with cloud spending.
Relative to its future operating cash flow, Amazon's stock has never been cheaper.
NYSE: BAC
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Bank of America
A second surefire Warren Buffett stock to pile into as the market plunges is financial giant Bank of America (BAC +0.07%).
With economic data pointing to a growing likelihood of a recession, cyclical stocks have taken a hit. This includes pretty much all financial stocks. When recessions occur, Bank of America typically sees a rise in loan delinquencies and a need to set aside more capital to cover loan losses. Moving this capital aside adversely affects its earnings per share in the short run.
However, there are two sides to being cyclical. Even though recessions are an inevitable part of the economic cycle, it's important to recognize that periods of expansion last disproportionately longer than downturns. Whereas BofA is forced to navigate through a couple of challenging quarters, it's often rewarded with multiple years of economic expansion. This leads to loan and deposit growth, which is how banks typically increase their profits.
What makes Bank of America such an interesting stock to buy right now is its interest rate sensitivity. No money-center bank will see its net-interest income climb or fall more due to shifts in the interest rate yield curve than BofA.
Last week, the Federal Reserve continued its fight against historically high inflation by raising its federal funds target rate 75 basis points. In total, the Fed has increased its target interest rate by 300 basis points (3 full percentage points) since the year began. This means Bank of America is generating more net-interest income on its outstanding variable-rate loans, and it doesn't have to lift a finger to have all of this added revenue flow straight to its bottom line.
What's more, Bank of America isn't getting nearly enough credit for its investments in digitization. The company ended June with 43 million active digital users, and it completed 48% of total loan sales online or via the mobile app during the second quarter, which is up from just 29% in the comparable quarter in 2019.
This digital push is meaningful because it's helping the company reduce its noninterest expenses. By encouraging users to bank online, it's reducing costlier in-person and phone-based interactions. Ultimately, BofA has been able to consolidate some of its branches and improve its operating efficiency over time.
At less than nine times Wall Street's forecast earnings for 2023, and with shares trading near book value, Bank of America looks like a screaming buy for patient investors.
Image source: Getty Images.
Berkshire Hathaway
The third surefire Warren Buffett stock to buy as the market plunges is none other than (cue the dramatic music) Berkshire Hathaway! Although you won't see Berkshire Hathaway stock in Buffett's investment portfolio, there's no stock the Oracle of Omaha and his right-hand man Charlie Munger have spent more money buying over the past four years ($62.1 billion in aggregate buybacks).
Similar to Amazon and Bank of America, Berkshire Hathaway has been clobbered lately by the likelihood of the U.S. entering a recession. The vast majority of Buffett's investment portfolio is packed with cyclical businesses in the tech, financial, energy, and consumer goods sectors. When economic weakness arises, lower consumer and enterprise spending tends to negatively affect these sectors.
But just as I noted with BofA, time is on Berkshire Hathaway's side. Instead of trying to time when inevitable recessions will occur, the Oracle of Omaha has packed Berkshire's portfolio with time-tested businesses that have navigated previous downturns and benefit immensely from long-winded periods of expansion. It's a simple numbers game that heavily favors long-term investors.
NYSE: BRK.B
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Berkshire Hathaway's success is also a reflection of the many dividend stocks held in its investment portfolio. Over the coming 12 months, Buffett's company is on track to collect more than $6 billion in dividend income -- much of which will come from a few core holdings. Dividend stocks have a rich history of outperforming companies that don't offer a dividend.
If you need another reason to consider buying Berkshire Hathaway stock, don't forget about Warren Buffett's track record. Although no investor is infallible, Buffett has overseen an average annual return of 20.1% for his company's Class A shares (BRK.A) since becoming CEO in 1965. Over 57 years, he's outperformed the S&P 500 in aggregate return by a factor of 120, including dividends paid (3,641,613% vs. 30,209%).
It's been a while since Berkshire Hathaway's stock was valued at less than a 30% premium to its book value, but that's precisely where we are now. This makes Buffett's company the perfect stock to buy during the bear market.
